[Senate Hearing 117-291]
[From the U.S. Government Publishing Office]
S. Hrg. 117-291
THE REEMERGENCE OF RENT-A-BANKS
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE REEMERGENCE OF RENT-A-BANK SCHEMES
__________
APRIL 28, 2021
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov/
_________
U.S. GOVERNMENT PUBLISHING OFFICE
47-913 PDF WASHINGTON : 2023
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Elisha Tuku, Chief Counsel
Tanya Otsuka, Counsel
Beth Cooper, Professional Staff Member
Dan Sullivan, Republican Chief Counsel
Alexander LePore, Republican Detail
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
(ii)
C O N T E N T S
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WEDNESDAY, APRIL 28, 2021
Page
Opening statement of Chairman Brown.............................. 1
Prepared statement....................................... 31
Opening statements, comments, or prepared statements of:
Senator Toomey............................................... 3
Prepared statement....................................... 32
WITNESSES
Josh Stein, Attorney General, State of North Carolina............ 6
Prepared statement........................................... 33
Responses to written questions of:
Senator Cortez Masto..................................... 88
Lisa F. Stifler, Director of State Policy, Center for Responsible
Lending........................................................ 7
Prepared statement........................................... 37
Responses to written questions of:
Senator Cortez Masto..................................... 89
Reverend Dr. Frederick D. Haynes, III, Senior Pastor, Friendship-
West Baptist Church, Dallas, Texas............................. 9
Prepared statement........................................... 72
Brian P. Brooks, Former Acting Comptroller of the Currency....... 10
Prepared statement........................................... 79
Charles W. Calomiris, Henry Kaufman Professor of Financial
Institutions, Columbia Business School......................... 12
Prepared statement........................................... 82
Additional Material Supplied for the Record
Letter in support of S.J. Res. 15 and H.J. Res. 35............... 92
Letter in support of CRA challenge to OCC predatory lending rule. 102
Letter from The Faith for Just Lending Coalition................. 130
Letter from Kwame Raoul, Attorney General, State of Illinois..... 132
Letter from NACA................................................. 143
Letter from NAFCU................................................ 146
Letter from Nick Bourke, Director, Consumer Finance, The Pew
Charitable Trusts.............................................. 153
Amicus brief: People of the State of California v. The Office of
the Comptroller of the Currency and Brian P. Brooks............ 156
Letter from the Electronic Transactions Association.............. 182
Statement submitted by ICBA...................................... 185
(iii)
THE REEMERGENCE OF RENT-A-BANKS
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WEDNESDAY, APRIL 28, 2021
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met, via Webex, Hon. Sherrod Brown, Chairman
of the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. The Senate Committee on Banking, Housing,
and Urban Affairs will come to order.
This hearing is in the virtual format. A few reminders as
we begin.
Once you start speaking, there will be a slight delay
before you are displayed on the screen. To minimize background
noise, please click the mute button until it is your turn to
speak or to ask questions.
You should all have one box on your screens labeled
``Clock'' that will show how much time is remaining. For
witnesses, you will have 5 minutes for your opening statements.
For all Senators, the 5-minute clock still applies, of course,
for your questions.
At 30 seconds remaining, you will hear a bell ring to
remind you your time is almost up. It will ring again at zero.
If there is a technology issue, we will move to the next
witness or Senator until it is resolved. And to simplify the
speaking order process, Senator Toomey and I have agreed to go
by seniority for this hearing.
Emerson teaches us that history is a battle between what he
called ``the innovators'' and ``the conservators.'' The
innovators work to find new ways to make Government work for
the people it serves and deliver results for everyone.
But the conservators--the corporations, the special
interests, the elite who have amassed wealth and power at the
expense of workers and their families--the conservators never
give up.
So it is with predatory lending.
In the late 1990s, payday lenders were desperate to find a
way to evade State laws that limited them from charging
exorbitant interest rates that trap people in a cycle of debt
they cannot get out of, no matter how hard they work.
They came up with what the OCC called ``rent-a-charter''--
what we now know as the ``rent-a-bank'' scheme.
Because banks are generally not subject to these State
laws, payday lenders funneled their loans through a small
number of willing banks. It looked like the banks were making
the loans when really it was the payday lenders.
Federal regulators, Republicans and Democrats, saw through
this ruse.
Under President Bush, the OCC described these rent-a-bank
schemes as ``abusive''--their words--and later warned about
banks that ``rent out their charters to third parties who want
to evade State and local consumer protection laws.''
In the years that followed, the OCC and FDIC shut down a
series of these schemes by payday lenders and banks.
States from across the country also stepped in to crack
down.
The Georgia Legislature in 2004 passed a law to crack down
on rent-a-bank schemes. Regulators in West Virginia and the
Ranking Member's and my home States of Pennsylvania and Ohio
and New York and Maryland and other States followed suit.
States also passed new laws to limit interest rates on
payday loans.
Since 2010, Montana, South Dakota, Colorado, Illinois,
Virginia, and last year Nebraska all passed laws to cap
interest rates on payday loans at 36 percent--still a very high
number that will make any company plenty of money.
Several other States, including California and Ohio, also
passed laws to limit the interest that can be charged on
consumer loans.
These new laws passed with overwhelming, bipartisan
support.
More than 75 percent of voters in Nebraska and South Dakota
supported the ballot initiatives to cap interest rates on
payday loans.
In recent years, new fintechs have emerged that partner
with banks to offer responsible small-dollar loans at
affordable rates.
Of course, the payday lobby did not give up. We now have a
separate group of online payday lenders resurrecting the same
old rent-a-bank scheme and not even attempting to hide it.
One online lender recently told its investors that it would
get around California's new law by making loans through ``bank
sponsors that are not subject to the same proposed State level
rate limitations.'' Another one said ``There is no reason why
we would not be able to replace our California business with a
bank program.''
Given the broad, bipartisan support for these laws, we all
hoped that the Trump OCC would take action and crack down on
these schemes--schemes that have been rejected by voters and
legislatures in State after State.
The last Republican administration under President Bush
stood up for consumers on this point.
But last year, the OCC issued what is known as the ``true
lender rule,'' overruling voters of both parties and giving a
free pass to these abusive rent-a-bank schemes.
The rule was rushed through by the Acting Comptroller who
cut his teeth helping banks ruthlessly foreclose on homeowners
and a Deputy Comptroller with deep ties to the payday lobby.
Republicans have selected the two of them to be witnesses at
today's hearing.
The OCC and Mr. Brooks have argued that the true lender
rule is necessary so that the agency has the necessary
authority to oversee banks' relationships with payday lenders.
But that is just not true. The OCC did not lack any
authority when it cracked down on rent-a-bank schemes in the
early 2000s.
The OCC also attempted to justify its efforts by claiming
that it promotes ``innovation'' and provides ``certainty'' to
the markets.
The only certainty we need is the certainty that workers
and their families will be protected from these exploitative
interest rates.
The last thing we should be doing is encouraging lenders
to, in their words, ``innovate.'' We know that just means new
ways to get away with ripping people off.
That is why across the country, a broad, bipartisan
coalition is asking Congress to overturn the OCC's harmful true
lender rule.
That support includes the National Association of
Evangelicals, the Southern Baptist Convention, and other
members of the Faith in Just Lending Coalition.
That coalition wrote to Congress: ``Predatory payday and
auto title lenders are notorious for exploiting loopholes in
order to offer debt trap loans to families struggling to make
ends meet. The OCC's `true lender' rule creates a loophole big
enough to drive a truck through.'' That was the Faith in Just
Lending Coalition words.
I would also like to submit the entire letter for the
record, along with letters from a bipartisan group of State
Attorneys General, State bank regulators, 375 consumer, civil
rights, labor, and small business organizations asking Congress
to overturn the true lender rule.
Today we will hear from one of the members of the faith
coalition, Dr. Frederick Haynes, senior pastor of Friendship-
West Baptist Church in Dallas.
We will hear today from North Carolina Attorney General
Josh Stein. He represents a bipartisan coalition of State
Attorneys General, including the Republican Attorneys General
in Nebraska and South Dakota, who have called on Congress to
overturn the OCC's true lender rule.
Like so much we do, this comes back to one question: Whose
side are you on? You can stand on the side of online payday
lenders that brag about their creativity in avoiding the law
and finding new ways to prey on workers and their families. Or
we can stand up for families and small businesses and the State
Attorneys General and State legislatures who have said,
``Enough'' and are trying to protect themselves and their
States from predatory lending schemes.
Some issues that come before this Committee are
complicated, they divide people, there are thorny nuances to
consider. This really is not one of them. It is simple: Stop
predatory lenders instead of encouraging them.
Ranking Member Toomey, you are recognized. Thank you.
OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY
Senator Toomey. Thank you, Mr. Chairman.
You know, in the last decade, we have seen financial
technology companies--fintechs--driving amazing new innovations
in financial markets. Fintechs have had remarkable success in
developing technology-oriented solutions to meet consumers'
needs.
As many banks have exited the personal loan market,
fintechs have filled the gap, and today they issue nearly 40
percent of all the unsecured personal loan in America.
In recent years, both nationally chartered and State-
chartered banks and credit unions have begun to partner with
fintechs to offer improved products and reach more customers.
This is particularly beneficial for community banks, who often
lack the resources to develop banking technology. In fact, 65
percent of community banks consider fintech partnerships
important to their business strategy.
These partnerships also generate significant consumer
benefits. Bank-fintech partnerships generate efficiencies that
can lower the price of financial products, expand consumer
choice, and increase competition. And these bank-fintech
partnerships offer a large variety of credit products--not just
small-dollar loans but credit cards, home equity lines of
credit, personal loans, auto loans, mortgages, and small
business loans as well.
Unfortunately, recent court rulings have applied differing
legal tests to determine which partner in these relationships
is the true lender who is legally responsible for the loans.
And these tests have created uncertainty that threaten to
reduce the access to credit for customers, especially for
riskier borrowers. That is why there has been bipartisan
congressional support and industry support for clarifying the
issue.
So last year, the OCC issued its true lender rule to
provide this much-needed regulatory clarity, and the rule holds
a national bank responsible for a loan when, at the time the
loan is originated, the bank is either named in the loan
agreement or it funds the loan. This allows the OCC to
supervise these loans and ensure that the bank is not evading
the law, including consumer protection laws.
Contrary to some claims, the rule is not intended to
facilitate ``rent-a-charter'' arrangements where banks do not
comply with the law. In fact, the OCC's rule does just the
opposite. A rent-a-charter arrangement means that no party
takes compliance responsibility for a loan. That is where the
true lender rule comes in and is different. It ensures that the
national banks that partner with third parties are accountable
for the loans they issue through these partnerships, and it
allows the OCC to supervise the origination of these loans.
You do not have to take my word for it. The current Acting
Director of the OCC--not a political appointee but one who has
been a career civil servant for more than 30 years--recently
wrote to Congress making this very point.
The true lender rule also provides the clarity needed for
bank-fintech partnerships to flourish and for national credit
markets to function. For over four decades, Federal law has
allowed both nationally chartered and State-chartered banks to
``export'' the State law governing interest rates from their
home State where they are based.
The true lender rule simply allows fintechs to partner with
banks, which already operate with these efficiencies.
Absent the true lender rule, uncertainty about who the true
lender really is creates uncertainty about whether the bank can
export its interest rate. If the bank guesses wrong, the loan
could be unenforceable. That uncertainty jeopardizes the
viability of the bank-fintech partnerships. More importantly,
it disrupts the functioning of the secondary market for credit.
Why does the secondary market matter? Because when a bank
sells a loan, it frees up capital to make another loans. This
is very well understood in the mortgage space. When a bank
sells a mortgage to the GSEs, it frees up the capital to lend
to an additional homebuyer. Well, the same principle applies to
the secondary market here.
Banks will likely issue far fewer loans if they cannot
reliably sell those loans into the secondary market. Fewer
loans means less access to credit; less access means higher
costs and less willingness to provide the limited supply of
credit to higher-risk borrowers. The result? The most
marginalized consumers are hit the hardest.
This is not just my opinion. Almost 50 leading financial
economists from prominent universities--including Harvard,
Stanford, and the University of Pennsylvania--made these very
points in an amicus brief in support of the OCC's true lender
rule.
We have empirical evidence, too. Studies have shown that
after a 2015 court ruling created uncertainty around the
ability to export interest rates to New York, it became
significantly harder to get loans in New York, especially for
higher-risk borrowers.
Despite the importance of the true lender rule, some, I
know, want to rescind it using the Congressional Review Act.
And I suspect the motivation is that overturning the rule would
subject more loans to State interest rate caps. But that may
not be the effect. I think the more likely effect is that these
loans simply will not get made.
That is why price controls are not the answer. They will
exclude people from the banking system. They will restrict the
credit supply and make it harder for low-income consumers to
access credit that they need.
The best form of consumer protection is a robust,
competitive market. Preserving the regulatory certainty and
clarity the true lender rule advances that cause.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Ranking Member Toomey, for your
comments.
I will introduce the witnesses.
Mr. Josh Stein is Attorney General of North Carolina. As
Attorney General, he works to protect North Carolina families
from crime and consumer fraud. He previously served as a State
Senator, as Deputy Attorney General for Consumer Protection in
the North Carolina Department of Justice.
Ms. Lisa Stifler is the director of State Policy at the
Center for Responsible Lending. She works with organizations
and lawmakers to eliminate abusive lending and debt collection
practices in her State. Ms. Stifler also advocates on the
national level on abusive debt collection and debt settlement
practices as well as predatory auto and student lending.
Dr. Frederick Haynes is senior pastor, activist, and
educator with the Friendship-West Baptist Church in Dallas. Dr.
Haynes currently serves as chairman of the board of the Samuel
DeWitt Proctor Conference, a board member of the Conference of
National Black Churches, and the National Action Network. He is
a member of the board of trustees for Paul Quinn College.
Mr. Brian Brooks is the former Acting Comptroller of the
Currency. Prior to becoming Acting Comptroller, Mr. Brooks
served as Senior Deputy Comptroller and Chief Operating
Officer. Before joining OCC, Mr. Brooks worked at Coinbase,
Fannie Mae, O'Melveny & Myers, and at OneWest Bank.
Mr. Charles W. Calomiris is Henry Kaufman Professor of
Financial Institutions at Columbia Business School, director of
the business school's Program for Financial Studies' Initiative
on Financing Growth in Emerging Markets, and a professor at
Columbia School of International Public Affairs. He previously
served as Senior Deputy Comptroller for the OCC.
Welcome to our witnesses. General Stein, we will start with
you. Thank you for joining us.
STATEMENT OF JOSH STEIN, ATTORNEY GENERAL, STATE OF NORTH
CAROLINA
Mr. Stein. Mr. Chairman and Members of the Committee, my
name is Josh Stein, Attorney General of North Carolina, and I
am pleased to have this opportunity to discuss the OCC's so-
called true lender rule. It is more accurate, however, to call
it the ``fake lender rule'' because predatory lenders dress up
their loans to try to make them look as though they were made
by an entity exempt from State usury law, such as a national
bank regulated by the OCC. If not reversed, this new rule
provides a get-out-of-jail-free card to predatory lenders who
violate State laws limiting interest rates and fees on consumer
loans.
For nearly 200 years, State and Federal courts, using the
true lender doctrine, have recognized and outlawed subterfuges
that put form over substance. This doctrine looks to whether a
predatory lender retains the predominant economic interest in
the loan to determine whether the predatory lender is the true
lender and, therefore, must comply with State rate caps.
North Carolina has a long history of strong laws and
vigorous enforcement against unfair consumer lending. For a
brief experimental period, from 1997 to 2001, North Carolina
law permitted payday lending. During that time we learned
firsthand the economic damage these incredibly high-cost loans
inflict on working families, especially those in neighborhoods
of color and near military bases.
The average borrower rolled over more than eight loans at
419 percent from the same store, and one out of seven borrowers
took out more than 19 loans per year. These loans were not a
source of occasional credit as the marketing suggested but,
rather, a debt merry-go-round borrowers could not get off.
Anita Monti, a 61-year-old grandmother from Garner, made $9
an hour working the second shift. She wanted to buy her five
grandchildren Christmas presents, but she was living paycheck
to paycheck. She went to an Advance America storefront and
borrowed $300. In 2 weeks, she did not have the money she owed,
and her electric bill was due. So she had to renew the $300
loans. Like so many others, she did this over and over.
After paying fees every 2 weeks for a year, in all nearly
$2,000 just to borrow $300. She was only able to repay the
original loan after earning a raise to $12 an hour and
scrimping on food.
Due to the exorbitant interest rates and patterns of
harmful, repeat borrowing that buried thousands of North
Carolinians like Anita in debt, North Carolina's Legislature
allowed this law to sunset in 2001. After the sunset, most
payday lenders complied and closed their doors. However,
others, including Advance America and ACE Cash Express, looked
for ways to circumvent North Carolina law using rent-a-bank
schemes. The banks' names were placed on the loan documents,
but the payday lenders marketed, underwrote, assumed the risk,
claimed the profits, and made the loans at sky-high interest
rates of up to 521 percent to North Carolina consumers.
After an enforcement action by the then-North Carolina
Attorney General, the North Carolina Commissioner of Bankers
held that the payday lender, despite its rent-a-bank
subterfuge, was, in fact, the true lender and, therefore,
subject to State usury law.
North Carolina is by no means alone in protecting our
borrowers. Other States have also relied on the true lender
doctrine to stop payday lenders from using rent-a-bank schemes
to evade their State interest rate laws. This new rule
threatens to upend efforts to protect our people. Along with
seven other Attorneys General, I filed a lawsuit in the
Southern District of New York challenging the rule, and we are
confident in our legal position. The congressional review
process, however, provides a far more straightforward and
quicker means to reverse the fake lender rule than does
litigation. That is why a bipartisan group of 25 Attorneys
General recently urged Congress to disapprove this new rule.
Protecting our constituents is our highest calling, and I
am proud to stand up for hardworking North Carolinians like
Anita. As Senators, you have the authority to help people like
her all across this country. It is an awesome power, and I ask
that you exercise it.
Thank you for your time.
Chairman Brown. Thank you, General Stein.
Ms. Stifler, you are recognized for 5 minutes.
STATEMENT OF LISA F. STIFLER, DIRECTOR OF STATE POLICY, CENTER
FOR RESPONSIBLE LENDING
Ms. Stifler. Good morning, Chairman Brown, Ranking Member
Toomey, and Members of the Committee. I am Lisa Stifler,
director of State Policy at the Center for Responsible Lending,
an affiliate of Self-Help Credit Union. Thank you for the
opportunity to discuss the single greatest threat to the
ability of States to protect their residents from payday and
other high-cost loans.
With the blessing and facilitation of Federal regulators,
we are seeing the reemergence of predatory rent-a-bank lending
schemes. In these schemes a nonbank lender makes loans at rates
higher than allowed by State law by renting the name and
charter of a rogue bank that is exempt from State interest rate
caps, and then the nonbank lender attempts to claim that
exemption for itself. These partnerships are shams, created
with the express purpose of skirting State law, and they trap
consumers in unaffordable loans.
The OCC's true lender rule will pave the way for more of
these schemes to proliferate. The rule was hastily proposed and
then finalized a week before the 2020 election, with the agency
failing to meaningfully address concerns raised in the more
than 4,000 comments filed. The rule facilitates rent-a-bank
schemes just like those used by payday lenders in the early
2000s until both Federal and State regulators shut them down.
The rule overturns the decades-long OCC position that these
sham arrangements are an abuse of the national charter. The OCC
also ignored the procedural requirements in the Dodd-Frank Act
established by Congress to prevent this exact kind of regulator
overreach--the OCC's aggressive preemption of State consumer
protection laws that precipitated the 2008 financial crisis.
It is no mystery what happens when these protections are
removed. The cycle of financial instability caused by high-cost
lending is the reason States adopted these protections in the
first place. The harms fall mostly on lower-income working
families and communities of color. That is why faith leaders,
community, and civil rights groups across the country are
united in opposition to this rule as well as Attorneys General
and State banking regulators from both parties.
How the OCC's rule will work is already clear, because OCC-
regulated banks are enabling some of the most predatory loans
on the market. For over a year, Stride Bank has been helping
the payday lender CURO pilot installment loans at rates as high
as 179 percent APR for loans up to $5,000. This outrageously
priced loan is illegal in almost every State, yet the OCC rule
invites predatory lenders to evade State laws by paying a bank
to put its name on the paperwork.
Another OCC-regulated bank, Axos Bank, rents its name and
charter to the predatory small business lender World Business
Lenders. WBL Loans run in the tens and even hundreds of
thousands of dollars and carry rates as high as 268 percent.
Often secured by the borrower's personal residence, these loans
are causing small business owners to lose their home.
The OCC is aware of these sham arrangements, but it has
taken no public action against the banks and even directly
supported WBL in court. Clearly, the agency's assurances that
the rule will not allow harmful loans are belied by these facts
and the agency's own actions.
People in communities across the country are reeling from
the economic impacts of COVID-19. As we look to create a strong
recovery for all, one way not to help these families is to
eviscerate State interest rate laws. Congress and the
prudential regulators should focus on ensuring a fairer
financial system that serves all consumers rather than creating
new avenues for predatory lenders to drive consumers further
away from the financial Main Street. Because Congress has not
yet enacted a Federal interest rate ceiling, State interest
rate limits are the only protection against high-cost predatory
loans.
This is not a close call or even a complicated issue. The
OCC's rushed and ill-conceived rule is bad for consumers and
small businesses, is bad for States' rights, overturns
centuries of case law, and is antithetical to the goal of an
inclusive economic recovery. And it is illegal under Federal
law.
Simply put, this rule facilitates loans illegal under State
law, not just any loans but ones reaching 200 and 300 percent
APR. That is the decision here--siding with illegal lending
practices or standing up against them. We urge you to stand up
against them and repeal the OCC rule.
Thank you, and I look forward to answering your questions.
Chairman Brown. Thank you, Ms. Stifler.
Dr. Haynes is recognized for 5 minutes. Welcome to the
Committee.
STATEMENT OF REVEREND DR. FREDERICK D. HAYNES, III, SENIOR
PASTOR, FRIENDSHIP-WEST BAPTIST CHURCH, DALLAS, TEXAS
Reverend Haynes. Good morning, Chairman Brown, Ranking
Member Toomey, and Members of the Committee. I am Frederick
Douglass Haynes, III. I serve as the pastor of Friendship-West
Baptist Church, a congregation of 12,000 parishioners in
Dallas, Texas.
I am grateful for the opportunity to morally appeal to you
on behalf of a broad and diverse faith community coalition that
includes Southern Baptist Convention's Ethics and Religious
Liberty Commission, the National Association of Evangelicals,
the National Baptist Convention, and the United States
Conference of Catholic Bishops--quite a diverse coalition. And
we are appealing to you because we must stop those who would
use their greed to exploit those in need through high-cost
predatory debt traps that we consider usury.
Faith groups of all traditions representing 118 million
Americans mobilized to call on the CFPB to enact a strong rule
addressing the inimical systems of payday lending debt traps.
We call on you now to stop this harmful rent-a-bank rule. Usury
and economic exploitation of the poor are condemned in all
faith traditions. Those who exploit the poor through predatory
practices are referred to in Scriptures as ``wolves.'' The
predatory practitioners of rent-a-bank schemes may well be
referred to as wolves dressed up in the legitimacy of a bank.
But the victims of such practices testify that an economic
predator by any other name is still trapping the desperate in
debt. These ``moral monsters,'' to use the language of James
Baldwin, feed their greed at the expense of the vulnerable.
For years we have worked to expose these debt traps clad in
deceptive wardrobes from the crass neon signs that litter the
neighborhoods of the needy to the polished promises of fintech
lenders who claim to be the saviors of families who need access
to credit. The con, of course, is that the access they impose
on these families is a deceitful, dead-end debt booby trap, as
they aim to draw them into a machine calibrated to siphon funds
from their bank accounts until they have all but bled them dry.
Many end up filing bankruptcy due to the moral bankruptcy of
the predatory lenders, who make them pay a high cost for being
poor.
I have seen this in my church. I could give you many
examples, but, quickly, a widowed grandmother paid back $800
for a $300 loan. Immoral. A young college graduate who worked
two jobs took out a payday loan as his mother became sick,
believing it would help him get through the crunch, but an
interest rate of 450 percent set him up to bring him down
financially. He ended up losing the car he needed to get to
work. That is immoral.
Predatory payday, car title, and installment lenders strip
billions every year by replicating a dreadful, disadvantageous
practice and hiring lobbyists to put a halo on their devilment
for lawmakers and regulators.
I am appalled by the harm done to those who face historic
divestment, who are exploited; they suffer from economic
injustice. These communities were crippled already by
redlining, and now they are being ripped off by the social
violence of financial predators. For decades banks used maps to
deny loans to communities of color, and now through rent-a-bank
schemes, they are using maps to locate and serve as legalized
loan sharks of those same communities.
Payday lenders have an ugly history of setting up shop in
Black and Brown neighborhoods. We have seen this firsthand in
the community surrounding our church here in Dallas, and
research bears it out. Now many are shifting to online loans
through rent-a-bank schemes and targeting the same struggling
communities.
That the OCC would open up our communities to more
exploitation when we are suffering already so severely from
COVID-19 is immoral; it is disgraceful that the OCC would give
predatory lenders a way to charge 200 to 400 percent interest
and even more, even in States that have fought hard to stop
this predation with a 36 percent interest rate cap. That is
indeed obscene, and as we would put it in my faith community,
it is sinful and demonic.
We strongly oppose the OCC's plan to enable predatory
lenders to ignore State interest rate caps. Please understand
true lending is really false. It is a lie. Jesus said the truth
will set you free, lies will lock you up. This is not a savior.
It is the seductive slave master, and we are calling upon you
to reject this.
Chairman Brown. Thank you, Dr. Haynes, for your comments.
Mr. Brooks, you are recognized for 5 minute.
STATEMENT OF BRIAN P. BROOKS, FORMER ACTING COMPTROLLER OF THE
CURRENCY
Mr. Brooks. Thank you, Chairman Brown, Ranking Member
Toomey, and Members of the Committee. Thanks for the
opportunity to discuss the OCC's true lender rule.
My testimony obviously provides more details, but I did
want to highlight several issues to help Members better
understand the rule, what it does and does not do, what it
achieves, and what the effect would be of overturning the rule.
So the OCC true lender rule clarifies when a national bank
or savings association is the true lender of a loan and
provides a bright line as to when OCC examination and
enforcement authority applies to ensure compliance with the
very consumer protection and other legal requirements being
discussed today associated with these kinds of loans. The rule
provides a plain language definition that a bank is the true
lender if, on the date of origination, it is named as the
lender in the loan agreement or if it funds the loan on that
date. The rule clarifies that, as the true lender, the bank
retains the compliance obligations associated with making the
loan, even if the loan is later sold.
Rather than a safe harbor, as critics of the rule suggest,
the rule ensures that the bank faces strict Federal supervision
for all the compliance considerations for making the loan,
including, but not limited to, fair lending, consumer
compliance, sound underwriting, and BSA and anti- money-
laundering regulations.
The rule actually negates concerns regarding harmful rent-
a-charter arrangements by preventing situations where banks
make loans on behalf of third parties, as we discuss
previously, and then walks away from any responsibility for the
loan.
In issuing the rule, the agency was acutely sensitive to
this issue and expressly that it would ``hold banks accountable
for all loans they make, including those made in the context of
marketplace lending partnerships or other loan sale
arrangements.'' Specifically, the OCC emphasized its
``expectation that all banks [will] establish and maintain
prudent credit underwriting practices and comply with
applicable law, even when they partner with third parties.'' If
not, ``the OCC will not hesitate to use its enforcement
authority consistent with its longstanding policy and
practice.'' And as I am sure Committee Members know, the OCC's
record here is positive, demonstrating significant enforcement
actions all the way back to the early 2000s that penalize banks
when they have allowed their charters to be rented out to abuse
consumers.
Now, the true lender rule must be understood in context.
True lender is the third component of a three-component legal
regime. Component number one of the regime is the principle of
interest rate exportation. The Supreme Court in its 1978
Marquette decision and Congress' 1980 enactment of the
Depository Institutions Deregulation and Monetary Control Act
allowed both national banks and State banks to export their
home State's interest rate to customers in other States. This
principle is not new, nor is it partisan. Marquette was argued
by Robert Bork but decided by Justice William Brennan on behalf
of a unanimous Supreme Court. The Monetary Control Act enjoyed
majority support of both parties and was signed into law by
President Jimmy Carter.
Now, the second component of the legal regime of which true
lender is a part is the ``valid when made'' concept. That
concept flows from the idea that banks have the ability to sell
loans to third parties. This is good policy because it allows
banks to take the money generated by the loan sale and recycle
that money into the next loan, thus increasing the total supply
of credit. And economic studies show that when banks are not
able to do this and their available funds to make loans is
reduced, the first people to suffer are low- and moderate-
income Americans. Court cases from around the country have held
that the interest rate on a loan that is valid when made by a
bank remain valid even after the loan is sold to a third party.
The exception is the famous Madden decision, and we now know
the effect Madden.
In the two States subject to that decision, loans to low-
to moderate-income Americans fell by 64 percent afterward. And
why? Because when bank lending is limited to the bank's own
balance sheet, the bank will first make loans to the safest and
usually richest borrowers. And when it runs out of lendable
funds or when it reached borrowers whose market rate of
interest exceeds the legal rate, it will stop lending. In other
words, Madden did not reduce the price of credit to those
borrowers. It reduced the availability of credit to people who
needed it most.
Criticism of Madden, again, is not a partisan issue.
President Obama's Solicitor General advised the Supreme Court
that the Madden court of appeals ``erred in holding that State
usury laws may validly prohibit a national bank's assignee from
enforcing the interest-rate term of a debt assignment that was
valid under the law of the State in which the national bank is
located.'' Again, that is the Obama administration's Solicitor
General speaking.
Having said all this, the true lender rule does not alter
States' authority to supervise their own banks or nonbank
lenders or to define what true lender means for State-chartered
banks, nor does it alter State authorities to license,
regulate, and enforce laws applicable to nonbank lenders and
financial services providers. And I think the States should
vigorously exercise those authorities regarding those State-
licensed companies.
I would note that the very payday lenders and others that
often come in for criticism are State-licensed companies, and
if the State has serious concerns about them, they are, of
course, free to revoke their licenses or take other action.
Senators, the issue here is that the price controls, and I
would ask you to consider that price controls result in
shortages.
Thank you.
Chairman Brown. Thank you, Mr. Brooks.
Dr. Calomiris is recognized for 5 minutes. Thank you for
joining us.
STATEMENT OF CHARLES W. CALOMIRIS, HENRY KAUFMAN PROFESSOR OF
FINANCIAL INSTITUTIONS, COLUMBIA BUSINESS SCHOOL
Mr. Calomiris. Thank you. Chairman Brown, Ranking Member
Toomey, Members of the Committee, it is a pleasure to be with
you today. I request that my written testimony and a supporting
document that I quote extensively in my testimony be entered
into the record as well.
I will explain the economic benefits that arise from
allowing financial institutions of various kinds to partner
with each other in providing lending services to their
customers in the context of an integrated national market for
loans. A massive amount of evidence has come to light showing
advantages of an integrated national market for loans that
permits diverse businesses with different comparative
advantages to work together in the lending supply chain.
Recently, a nonpartisan group of 47 leading scholars of
banking working at America's greatest universities summarized
this literature in an amicus brief, which was filed in support
of the OCC's defense of its ``valid when made'' rule and, by
extension, its true lender rule. My testimony describes that
consensus, which is remarkably clear and unequivocal.
The true lender rule clarifies that a bank that originates
a loan retains the consumer protection obligations related to
making that loan and whether or not it sells the loan to
another party. Some State authorities oppose the ``valid when
made'' and true lender rules to preserve the ability of the
State to enforce usury laws that limit interest rates on loans.
If State challenges were upheld in the courts, that would
wreak havoc on the national market for loan sales. But why does
that matter to individual consumers? A central insight of the
amicus brief is that the competitive abilities to originate
loans, to hold loans, or to perform other services related to
loans in the supply chain differ across providers. Pooling
funds and skills in the loan supply chain within an integrated,
competitive, and innovative national market makes loans cheaper
for borrowers.
A quote from the brief: ``If the usury law of the loan
buyer's State applied to the loan, the market for loan sales
would be significantly disrupted: an institution in one State
could legally make the loan but institutions in other States
may not purchase it with the same pricing. Consequently, the
integrated secondary market for loan sales would be reduced and
fragmented across groups of States with similar usury laws.
Therefore, to preserve a well-functioning market for loan
sales, the OCC's Rule should be maintained.''
Low-income risky and small-dollar borrowers would be
especially harmed if the rule were rejected. ``The expansion of
lending and lowering of risk made possible by loan sales should
lead to more financial inclusion and broader access to credit.
Studies have shown that loan sales reduce the interest rates
that borrowers pay on their loans and increase the likelihood
that borrowers will receive a loan. These advantages should, in
theory, be especially important for small and risky borrowers,
who are often excluded from receiving loans when credit is
constrained. Moreover, many innovative new fintech lenders rely
on loan sales as a means of leveraging their origination
capabilities, which can carry particular benefits for less
wealthy or higher-risk borrowers. Limits on the viability of
the loan sales market would therefore have adverse effects on
the underserved by limiting their ability to receive lower cost
loans as well as receive funds through innovative financial
inclusion intermediaries.''
But shouldn't we worry that allowing loan sales across
State lines undermines the effectiveness of usury laws? Is that
a bad thing? Quoting again from the study, ``Usury rates
attempt to restrict any potential market power that banks can
use to disadvantage borrowers. However, usury ceilings also
could differentially curtail loans to riskier and lower-quality
borrowers, thus pushing them toward less-regulated types of
borrowing. Empirical research quite broadly supports the notion
that the latter effect dominates: that riskier-looking
borrowers (who are often minorities or others with limited
financial access) are hurt when usury ceilings are binding and
benefited when they are loosened or eliminated.''
I will close with two of my observations. Advocates of
usury laws point to borrowers' lack of information as a
rationale for usury laws. A borrower could qualify perhaps for
a loan at 8 percent, but may not be aware of that, and a lender
might trick him or her into agreeing to a much higher interest
rate. This sort of trickery is possible when loan markets lack
competition and when borrowers lack information about their own
credit risk. As the appendix to my testimony shows, the role of
new fintech entrants, who should not be confused with payday
lenders--in fact, they are the competition of payday lenders.
As the appendix shows, the role of new fintech entrants in
strengthening competition and empowering borrowers with new
sources of information are precisely the reasons that fintech
firms are making important contributions to financial
inclusion.
I will stop there. Thank you very much.
Chairman Brown. Thank you, Dr. Calomiris, for your
testimony.
I will begin the questions and then turn to Senator Toomey.
I will start with Dr. Haynes, Dr. Frederick Douglass Haynes.
You are testifying today as part of a broad coalition of faith-
based institutions working to end predatory lending, as you
made clear. These institutions politically certainly differ all
across the political spectrum. Why are they united in this work
to end predatory lending and opposed to the true lender rule?
Reverend Haynes. Well, because of the fact that across all
faith traditions, you know, usury is condemned. Economically
exploiting those who are already vulnerable, those practices
are condemned. In both the Hebrew Bible as well as the Greek
New Testament, usury is condemned. Jesus overturned the money
tables that may well be fintech or payday loan scores of his
day. The Hebrew Bible repeatedly warns against usury, so this
is something that we are joined together because morally we all
agree that usury is wrong. Morally we all agree that
exploitation of the poor is something that God frowns upon. And
so that is why, again, though we may be ideologically and
politically different, we all agree morally that usury damages
any community.
Chairman Brown. Thank you, Dr. Haynes.
Ms. Stifler, how is the true lender rule from the OCC
different from how the agency approached rent-a-bank schemes
under the Bush administration?
Mr. Stein. Thank you for asking this question, Senator
Brown. This rule, the OCC's rule, is a 180-degree change in
policy. Under the Bush administration, the OCC emphasized that
preemption was an inalienable right of the bank itself. It
looked at rent-a-bank schemes and said that preemption is not
like excess office space in a bank-owned office building that
the bank can just rent out. So it shut the schemes down.
The OCC then finalized the true lender rule by absolute
contrast, laid out a welcome mat to predatory lenders, and
said, ``Here is your preemption.'' Put another way, the OCC
under the Bush administration looked at the substance of the
transaction just as courts have done for hundreds of years, and
the OCC that issued this rule prioritized what is on a form on
a piece of paper, even if that is a sham.
Chairman Brown. So do you think the Bush era OCC would have
shut down this rent-a-bank scheme if the new true lender rule
had been in place?
Mr. Stein. No, not the ones that we saw back in the 2000s,
the ones that General Stein talked about that North Carolina
and other States shut down. What we saw in those was that on
the paperwork all that was required was a name on the loan, and
that is what we saw in the early 2000s. So even though from the
consumer perspective they might walk into the payday loan
store, say Advance America, they got the loan at the Advance
America store, they made payments to Advance America, they
dealt with the collection attempts from Advance America, and
were sued by Advance America because the bank's name--in this
case it was People's National Bank--was on the loan document
under this rule that would have been sufficient and would not
have been shut down. It would have been allowed.
So, yeah, the schemes in the 1990s and 2000s would not have
been shut down like they did.
Chairman Brown. Thank you for that.
General Stein, the OCC claims the true lender rule does not
limit States' ability to regulate payday and other nonbank
lenders. You testified, in fact, the rule preempts State law,
takes away your authority to shut down rent-a-bank schemes that
are targeting residents in your State of North Carolina. Can
you explain why?
Mr. Stein. Yes, the reason we succeeded in North Carolina
in running the payday lenders out in 2004 and 2005 was because
we brought a case to the Commissioner of Banks, and they
concluded that the predominant economic interest of those loans
was the payday lenders. Their relationship, the payday lenders'
relationship with the banks, the national banks, was simply
paying them for use of their logo on the bank application form,
on the loan application form.
If the true lender rule, as presented by the OCC, takes
full effect and is not repealed by Congress, the exact same
relationship that we successfully defeated and ran out of North
Carolina, it will be challenging for us to win such a case in
the future. And this decision about what is in the interest of
North Carolina consumers, I am sorry, is not for the OCC to
make. It is for the people of North Carolina through their
State elected representatives, it is their decision to make.
And we have made that decision. I have heard a couple of people
testifying that there is a concern about shortage of credit. We
want a shortage of high-cost, illegal, harmful loans. That is a
good thing and a decision that we as a State have made.
Chairman Brown. Thank you, General Stein.
Senator Toomey is recognized.
Senator Toomey. Thank you, Mr. Chairman.
Let me go to Mr. Brooks. it seems to me one of the
principal virtues of the true lender rule is that it creates a
clear rule, provides certainty in advance about who is
responsible for a loan when banks and nonbanks partner to make
the loan. Could you just tell us, why is that important? Why is
it important for market participants to have that regulatory
certainty? And what would the effect be if this rule gets
repealed and there is no certainty?
Mr. Brooks. Well, Senator Toomey, I really appreciate the
question. The certainty that is most important here under the
true lender rule has to do with the certainty of the interest
rate enforceability, OK? So the question is: Should banks
invest dollars in lending to low- and moderate-income people
whose risk profile necessitates a somewhat higher interest rate
for the loan to be valid and profitable?
If the bank is not sure or if the markets are not sure
whether that interest rate will be valid when that loan is sold
into a credit card securitization or sold into a personal loan
securitization, the market will not invest in that, which means
that those loans go away. And I cannot emphasize this too much.
It is not that the loans become cheaper. It is that the loans
go away. And I think General Stein's comment that there are
people out there who actually want those loans to go away is an
interesting sort of lens into the way to think about this----
Senator Toomey. Let me just--I mean, the idea that we
should forbid people from having access to loans because they
cannot be trusted to make a good decision for themselves, does
that strike you as a little bit patronizing and condescending?
Mr. Brooks. Well, you know, Senator, I guess I would
hesitate to make characterizations of other people who I
respect, but, look, our thought at the----
Senator Toomey. I am talking about the idea.
Mr. Brooks. Yeah. The idea is not consistent with the
concept of a pluralistic, capitalist democracy. Personally, I
took our relatively high interest rate student loans that were
not tax deductible that today people would find shocking. That
is what allowed me to get my life on track from a low-income
small town in southern Colorado. And so I do not look at
interest as a bad thing. If I am someone who has dings on my
credit and I need a 2-year personal loan to replace my roof or
do one of the many things that people use these loans for, I do
not think it is up to me to say that is a bad thing.
Senator Toomey. Yeah, it might be OK for the consumer to be
able to make that decision.
Mr. Brooks. Right.
Senator Toomey. Some have suggested that the true lender
rule creates a new legal regime that effectively revokes State
usury laws and allows nonbank lenders to issue these loans that
are not subject to regulatory oversight, so both of these
things. But as I think you mentioned in your comments, for many
decades, both federally and State-chartered banks have had the
legal authority--and it really has not been very
controversial--to export their interest rates.
So does the rule really have the effect of undermining
States' rights? And what about this claim that somehow it
creates a regulatory wasteland where these loans are just not
subject to regulation?
Mr. Brooks. Yeah, so, Senator, there is a lot there, but I
would just say, first of all, the concept is not new. As I say,
you know, Justice Brennan, no less, writing for a unanimous
Supreme Court, upheld the principle of rate exportation.
President Jimmy Carter upheld that right for State banks as
well. And so to be clear, the idea that a rate of interest can
be charged that is higher than the borrower's home State rate
has been the law of the land since 1978. There is nothing new
about that, and that was supported by broad, bipartisan
majorities of both parties.
In terms of the regulatory wasteland, there are two points
to understand here. First of all, these predatory lenders, the
people you are talking about, are State-licensed entities. Let
me repeat that. They are State-licensed entities, and a State
is absolutely free to yank the license of any of those kinds of
companies that it wants to, and it should if it thinks that
consumer abuses are going on.
The point of the rule, however, is simply to make clear
that banks can leverage their balance sheet through loan sales
to make more credit available to more people. If that principle
is debatable, I think someone should stand up and debate it.
But if the idea is Advance America's, they should have their
licenses yanked by the State who licensed them.
Senator Toomey. Thanks. Just quickly, Professor Calomiris,
you know, I think somebody clearly indicated that their concern
with the true lender rule is that if it were overturned, it
would subject some number of additional loans to State price
caps in the view that price controls are good for consumers. Is
it your view that price controls are good for consumers and
that that is what we ought to seek? I think your mic is off.
Mr. Calomiris. Oh, somebody--is it on now?
Senator Toomey. Now it is, yes.
Mr. Calomiris. The evidence which I summarized in my
statement clearly shows that usury laws are bad for consumers,
that they limit credit availability for consumers, especially
for low-income and small borrowers and high-risk borrowers. So
there is no question about that. That is not just my opinion.
That is the entire economic literature.
What I would also point out is that the opportunity that I
think all of us have in our minds that we would like to see,
borrowers who can qualify for lower interest rate loans not be
tricked into high interest rate loans. I think that is a valid
issue. And what I want to point out, I hope everyone will just
take a few minutes to read my 5-page appendix, on what is going
on right now in financial inclusion and protecting consumers
coming from these fintech bank partnerships. It is really
exciting. It is quite impressive. It has absolutely nothing to
do with payday lending except that it is an alternative to
payday lending, and it is steering low-income and low-dollar
borrowers to much lower interest rates. That is what is at
stake here.
So I think we have a pretty severe mischaracterization of
these very flexible and innovative new partnerships that are
really empowering consumers in new ways, and I give many
examples in my testimony. Since I wrote my testimony, some
people have actually come to me and said, ``Hey, you left me
out. I am a firm that is doing this, too.'' So it is actually a
very broad-based and exciting new movement, and I hope we do
not, in some misguided attempt to thwart something, undermine
this progress.
Senator Toomey. Thanks very much.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Toomey.
Senator Reed from Rhode Island is recognized for 5 minutes.
Senator Reed. Thank you, and let me direct my question to
Attorney General Stein. There has been a recurring discussion
about the effect of interest rate caps, usury laws on
unintended consequences, and restricting credit. I think in
North Carolina you actually have some real evidence of what
happens when a law is impose and then again when it is taken
off. Could you comment on that, General?
Mr. Stein. I would be happy to, Senator Reed. Thank you.
Yeah, we actually are a bit of an experiment. I guess that is
how federalism is supposed to work. We authorized it, and then
we took away that authorization. And there was an extensive
study done by UNC after the law went away surveying low-income
households and universally needed credit. And the conclusion of
the survey was that the absence of storefront payday lending
did not have a meaningful impact on availability of credit to
households in need because there were an array of other options
available to them.
In fact, when they asked the households what they thought,
90 percent of them said that they thought payday lending was a
bad thing. And of the universe of those households that had
taken out payday loans in the past, by more than a 2:1 ratio,
they said these were bad things, not good things; that they
were incredibly easy to get into because of the marketing and
ease, but incredibly difficult to get out of.
And so, yes, there are alternatives to credit, alternative
credit options to people that are not exploitative, and that is
much better.
Senator Reed. Thank you very much, General.
Ms. Stifler and Dr. Haynes, we have been talking about sort
of the direct course and repayment of these loans with high
interest, but we are working with Chairman Brown and others to
pass the Military Lending Act, which has a 36-percent cap on
loans. And when the Department of Defense was finalizing its
rules, they pointed out there are associated costs to the
payday lending. People sort of literally lost their jobs
because they became insolvent and they were discharged, and the
discharge cost additional money.
So could you perhaps talk about some of the nonmonetary
costs that have been incurred because of predatory loans?
First, Ms. Stifler.
Ms. Stifler. Thank you, Senator Reed. I would be happy to.
So there are payday and other high-cost loans that are
associated with a cascade of long-lasting financial
consequences. They include bankruptcy, insufficient fund fees,
other bank penalty fees, and often being shut out of the
banking financial mainstream because of bank account closures.
Borrowers who take out car title loans often lose their cars to
repossession and are unable to get to work and are at risk of
losing their jobs. A lot of the debt associated with high-cost
loans come with health consequences due to stressors of being
in debt. And for small business borrowers, they deal with
harassment, bank fees, bankruptcy, loss of their business, and
often loss of personal homes.
So those are just some of the other additional harms, and I
am sure Dr. Haynes has some personal stories that he can bring
to bear.
Senator Reed. Thank you. Doctor.
Reverend Haynes. Right, and I will just add that the attack
on the mental health of those who find themselves stressed out
because they cannot, again, pay off the loans, and their
economic situation not only spirals downward and they find
themselves again stressed, but there are so many other
ramifications, it is almost a domino effect of consequences. So
when you move from the mental health, not only to mental
health, but then the families, I have literally seen families
fall apart because they could not handle the stress of having
been put in the debt trap that they found themselves in.
And so mental health as well as families falling apart are
just two examples of the cascading effect of these predators.
Senator Reed. Thank you very much. I am not aware of my
time, Mr. Chairman. I have one other question.
Chairman Brown. Certainly. Proceed, Senator Reed. Go ahead.
Senator Reed. Ms. Stifler, you said in your written
testimony, ``predatory lending is fundamentally, structurally
different than responsible lending. High-cost lending turns
incentives on their head, so that lenders succeed when
borrowers fail.'' Could you explain that?
Ms. Stifler. Certainly. With reasonably priced loans,
lenders only succeed when borrowers are able to repay the
principal. But with high-cost loans, this is not the case. So
with a high-cost installment loan like many in these rent-a-
bank schemes that we are seeing, the high interest rates slow
down the repayment of principal so much that the borrower can
pay for months or even years without making virtually any dent
in the principal. But the borrower has paid so much in interest
alone by then that the lender who has already reached a profit
on the loan without the borrower's principal balance decreasing
at all.
There are examples. For example, in Maryland, a borrower
took out a $2,000 installment loan with Opportunity Financial,
also known as OppLoans, that is offered through a rent-a-bank
scheme that the District of Columbia Attorney General was suing
for their rent-a-bank scheme. And after more than a year of
paying on that loan, the borrower reported having paid $4,600,
and the principal, the $2,000 loan had not decreased at all.
So this is an example of how truly unaffordable loans can
get you stuck in the debt trap, and the flip of what affordable
loans do for borrowers as they are actually paid off.
Senator Reed. Thank you.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Reed.
Senator Tillis of North Carolina is recognized for 5
minutes.
Senator Tillis. Thank you, Mr. Chairman. And a special
welcome to General Stein. It is good to see you. We spent time
in the legislature together.
I first have to go back to my time. When I was 13 years
old, I knew what a 90-day note was because that is what my dad
got back when we had personal banking relationships, and some
of the larger banks or regional banks were willing to take a
risk on somebody who had no guaranteed income stream. I did
construction work for him. He would get a project from
insurance damage. He would go to the bank, get a 90-day note
with the understanding that we could probably get it done in 60
days and pay it off.
Nowadays, you virtually have no personal banking
relationship with the large banks, particularly for somebody
like my father who had six mouths to feed, and I would argue
probably a relatively high-risk profile. Fortunately for him,
he was able to pay them off.
But, Mr. Brooks and Mr. Calomiris, it seems like those days
are gone from most of the large banking institutions, so I am
worried--when I was in the legislature, invariably when we
would have a discussion about shutting down some of these
higher interest rates, higher-risk loans, the caucus that came
to me first was the African-American communities that the lower
interest loans were not going to be available to them, and so
they were more likely to go off the books and get loans from
people who were far more predatory because they escaped any
regulatory oversight. Do you agree with that opinion, if we are
not careful with the policies moving forward with the OCC rule?
Mr. Brooks. So, Senator, I will kick it off, if I might,
and thank you for the question. I would say the whole point of
the work that the OCC did over the last year, starting with the
small-dollar lending guidance and culminating in true lender,
was to get banks more involved in this market so that we had to
rely less on nonbanks. I do find it a little bit puzzling why
we are spending so much time talking about payday lending when
I do not think the OCC is ever likely to endorse a payday
lending arrangement at all. What we are really talking about is
the personal loan market, the market where fintechs now have a
larger market share than banks do because banks have left that
segment. And that market is all about people like your dad. We
are talking about $5,000 to $15,000 balance loans that do not
have a 2-week repayment and are not refinanced a hundred times.
We are mostly talking about installment loans that have, you
know, a 90-day to 2-year repayment period at interest rates
that range from 20 to 50 percent. That is sort of the core of
what that market is, and it is all about your dad. Banks
stopped making those loans a long time ago because of
consolidation. The question is: How can we get supervised
entities back in the market to do that in a way that holds
somebody accountable? That is the point.
Senator Tillis. Mr. Calomiris, I want to go to you, but I
would also like you all to add to our talk again. I think
Senator Toomey spoke about this. We just want to get rid of all
these high-interest loans. When we do that, the inference you
could draw from that, somebody who is watching this hearing, it
is because there is going to be a plethora of low-interest
loans for that same base. So if you can respond to my first
question and add color to that, then, Mr. Brooks, we will go
back to you.
Mr. Calomiris. Well, I want to answer both your questions.
First, the answer is that, yes, the economics literature has
shown--and both the amicus brief and in my testimony, it says
so--that the people who suffer from these very binding usury
ceilings are lower-income, small-dollar, and higher-risk
borrowers, absolutely. That is the evidence very clearly.
And what is really exciting--and I want to be more
positive. What is so exciting is that what we are seeing with
these fintech providers who are partnering with banks in the
loan supply chain is that they are actually helping to bring
more credit at lower interest rates and that they are not just
doing that by providing capital, but they are also providing
education, different language consultation services. They are
making sure people are not tricked. And this is really helpful.
So characterizing this as payday lending is just completely
false. As Mr. Brooks said, this is not about payday lending.
The OCC is not involved in payday lending or sanctioning. This
is about broadening the base of access for consumers, and that
is really where the discussion should be focused. I hope people
will read my appendix, give a little bit more of a sense of the
richness of what is going on right now.
Senator Tillis. Well, I thank you both for your responses.
I may have a couple of questions for the record.
Look, there is no question that there are predatory lenders
out there, and there is no question--that is why I supported
financial literacy initiatives when I was Speaker of the House
in North Carolina--that we need to make everybody aware of
their lowest-cost option for financing. Count me in for doing
that. But removing this for the dads of today who are trying to
get that short-term loan to put food on the table for six kids,
count me out of that.
Thank you, Mr. Chair.
Chairman Brown. Thank you, Senator Tillis.
Senator Warren of Massachusetts is recognized for 5
minutes.
Senator Warren. Thank you, Mr. Chairman.
So in our legal system, States set interest rate caps,
determining what interest rates constitute usury. If I lend to
my neighbor in Massachusetts, our interest rate will be capped
at the Massachusetts maximum, which is 20 percent.
The idea of protecting borrowers from usury dates back to
the Code of Hammurabi, to the Bible, to the Koran, to every
colony in prerevolutionary America, and to every State in the
United States. In 1979, the Supreme Court took that away,
opening a loophole to let federally chartered banks escape
centuries of usury laws. And then over time, banks figured out
that they could open that loophole even wider through the so-
called rent-a-bank scheme.
Now, under this arrangement, a nonbank lender like an
online lender or payday loan company that would usually be
subject to usury laws finds a bank that is willing to originate
a loan on its behalf and funnels the loan through the bank and
avoids State interest rate caps. That means that instead of
interest rate caps like 20 percent, which the State legislature
determined, interest rates can go to 35 percent or 400 percent
or 1,000 percent.
Last year, the OCC issued a rule clarifying who is entitled
to the usury exemption in cases like these.
Mr. Brooks, you were Acting Comptroller when the OCC's true
lender rule was finalized. The rule acknowledges that rent-a-
bank schemes have, and I am going to quote you here, ``no place
in the Federal financial system.'' Is that your personal view
as well?
Mr. Brooks. Oh, absolutely.
Senator Warren. Good. It is mine, too. So let us take a
look at what the rule you pushed through actually allows. Mr.
Brooks, under your rule, if a payday lender arranges a loan for
a consumer, it is subject to State usury laws. But under the
OCC's new rule, if that same payday lender arranges for a bank
to originate the loan and then the payday lender immediately
buys the loan back from the bank to collect the payments, the
bank would be considered the true lender so long as it was
named in the loan agreement, and that loan would be exempt from
the State's usury laws under this rule from the OCC. Is that
correct?
Mr. Brooks. If the bank is named as the lender, so the
consumer is told that that is their lender, or if the bank
funds the loan, then, right, the bank is expected to treat that
as though it is its own loan for underwriting, consumer
protection, and all purposes.
Senator Warren. And because banks have an exemption from
State usury caps, there would essentially be no limit as to
what the payday lender could charge a borrower if it just
funnels its loan through a bank. So could it be 20 percent or
35 percent or 400 percent or 1,000 percent?
Mr. Brooks. Well, Senator Warren, I disagree with the
premise, because in the example we are talking about, it is not
that the payday lender is charging a rate. It is that the bank
is charging a rate, which means the bank has to assess ability
to repay. They have to assess fair lending and everything else.
It is not that the payday lender is originating. It is that the
bank is originating subject to supervision.
Senator Warren. Well, I see what you are trying to do with
the language about who is originating. I understand that the
payday lender has gotten the bank to put its name on the paper.
But my question is: If it is the payday lender who finds the
customer, who has the whole idea, who puts this together, but
gets the bank to put its name on the paper, will that loan be
subject to usury laws? It is a pretty straightforward question.
Mr. Brooks. I think, Senator Warren, it is the preamble to
the question that is not straightforward, because the preamble
assumes that the bank would originate a payday loan with all
that implies, with the likelihood of refinance, with the likely
inability to repay. Banks are not allowed to do that. The whole
point----
Senator Warren. Well, let me just stop you right there,
just because I want to be clear on this. The new rule you have
put in place says let us look at the paperwork, and if the
bank's name is on the paper, that is what is going to control.
Now, I realize that you want to talk about the additional
other places that there are rules and regulations governing the
behavior of the banks. So the OCC is going to let payday
lenders get an exemption from usury laws, but the OCC is going
to continue to take enforcement actions when the bank
originates a loan if it does not consider, for example, the
borrower's ability to pay. In other words, I think what you are
saying to me is the OCC will be tough on banks. Is that right?
Mr. Brooks. Well, there is a lot that you said that I
disagree with, but, yes, the OCC's history of being tough on
banks in non-ability-to-repay circumstances is pretty well
demonstrated.
Senator Warren. If the Chair will just indulge me for a
minute here, I want to look at the OCC's history on how tough
you have been. Let me just look at an example from
Massachusetts, and that is, in 2018, Axos Bank rented itself
out to a nonbank company called World Business Leaders to lend
to a Massachusetts small business at 92 percent interest, which
is well above our Commonwealth's usury cap of 20 percent. The
company arranged the loan, set the terms, collected the
payments, but the name Axos Bank was on the loan document.
So let me just ask you, Mr. Brooks, this one will be a
really short question. How many enforcement actions has the OCC
taken against Axos Bank in recent years?
Mr. Brooks. It is a great question, but we did not have the
true lender rule in 2018, which is sort of the point.
Senator Warren. So how many enforcement actions did you
take? Because all the rest of the rules were still in place.
Mr. Brooks. Senator Warren, I personally imposed more than
$1 billion in penalties----
Senator Warren. So how many--it is a really straightforward
question. I have got one bank charging 92 percent interest. How
many enforcement actions did you take? There is a word you do
not want to have to say here.
Mr. Brooks. I am not sure.
Senator Warren. Zero. None. Under the previous
Administration, banking regulators wrote rules the way the
banking industry wanted, created loophole after loophole for
bad actors, and put the interests of the wealthy and the
powerful ahead of families and small businesses. We are going
to have a chance to vote on this in the Congressional Review
Act resolution to nullify the true lender rule, and I very much
hope that we pass that and undo the damage that the Trump-
appointed regulators have done.
Thank you, Mr. Chairman, and thank you for your indulgence
on time.
Chairman Brown. Thank you, Senator Warren.
Senator Cortez Masto is recognized for 5 minutes.
Senator Cortez Masto. Thank you, Mr. Chairman, and thank
you to the panel. I so appreciate the conversation today. It is
just so important.
Mr. Brooks, let me ask you this: Some nonbank lenders have
openly acknowledged that they are funneling their loans through
banks to evade State interest rate caps. Isn't that true?
Mr. Brooks. If there is a nonbank lender that said any of
those words, I would be very, very surprised.
Senator Cortez Masto. Well, they have. So as the regulator,
doesn't that concern you? As a former regulator, shouldn't that
concern you?
Mr. Brooks. Yeah, so, Senator, I am not aware of anyone who
has publicly said they are either funneling or----
Senator Cortez Masto. I understand. I am telling you they
have, and so I appreciate that, but as somebody that now is
making you aware of it, I would assume--maybe I should not
assume--that you should be concerned about it. And isn't it
true that the FDIC has not proposed any similar rule?
Mr. Brooks. Well, that is not quite right. So as I said,
there are three laws that work together. They are all
integrally related. So there is the interest rate exportation
rule, which I do not think anybody is questioning. There is the
``valid when made'' rule, which really is what this whole
discussion has been about today, because this really has not
been about true lender; it has been about whether a bank can
sell a loan to a nonbank and have the interest rate travel. And
the FDIC did adopt that rule around the same time the OCC
adopted it.
Senator Cortez Masto. So let me ask you this, let me ask
you this, because you are going to talk it to death. And I
appreciate that. Listen, I have listened and I appreciate that.
But as a former Attorney General, I have to be concerned about
those individuals who are out there that literally are using it
to skirt around State laws. You know that. We know that. It is
happening. And I appreciate where you are coming from because
you were the Comptroller, Acting Comptroller, when this law was
passed.
Let me ask Attorney General Stein, based on this new rule
that banks' names on paper control and the example that Senator
Warren just gave to Mr. Brooks, how would that affect your
ability to challenge a payday lender and a bank who is skirting
your State interest rate caps? Would it make it more difficult
to challenge that arrangement and protect your constituents in
your State?
Mr. Stein. Thank you, Senator Cortez Masto. Absolutely.
This is a perfect example of the OCC trying to preempt States'
ability to protect their people from unlawful, high-cost,
harmful loan products. Now, ask yourself: These third-party
lenders, are they doing these relationships with national banks
in States that do not have interest rate caps? No. They will
only enter into these relationships with national banks because
they have to take a slice of their fee to pay the bank for use
of the logo on their application form. They do not want to do
it if they do not have to. They only will do that in States
like North Carolina, like Massachusetts, like Pennsylvania,
where the State legislatures have made the determination that
they want to protect their people. And the OCC will make it
much more difficult for us to enforce State law against those
types of subterfuges.
Senator Cortez Masto. Thank you. And let me just say, in
the FDIC's 2019 How America Banks survey, 5.7 percent of Nevada
households had taken out a payday loan. That is the highest in
the Nation. And according to the Center for Responsible
Lending, the typical annualized percentage interest on a payday
loan in Nevada is 652 percent. Now, our State legislature has
taken steps to regulate payday lending, including the
development of a data base tracking payday loans.
Ms. Stifler, let me ask you this: Would the OCC's new rule
undercut Nevada's ability to track those loans to consumers or
even challenge the State from taking future action to limit
predatory lending?
Ms. Stifler. Thank you for that question, Senator. Yes,
this rule will impede Nevada's ability to track loans and also
in the future to set interest rate limits. But one thing I want
to clear up around confusion that is happening around why we
are talking about payday loans. It is because payday lenders
are engaging in these schemes right now, online and in stores.
Just as Mr. Calomiris--sorry if I am pronouncing that wrong--
has found fintech companies engaging in good behavior, we have
been finding daily payday lenders and other high-cost lenders
engaging in online and in-store behavior. Check into Cash, one
of the frequent users of rent-a-bank schemes in the 2000s, is
using the scheme again in States like Ohio, Arizona, Virginia,
Nebraska, and California, States that have capped rates in
recent years on payday and other high-cost installment loans
and are doing it in-store and online.
Senator Cortez Masto. Thank you. I know my time is up.
Thank you so much, Chairman Brown, for this great conversation
today.
Chairman Brown. Thank you, Senator Cortez Masto.
Senator Van Hollen is recognized for 5 minutes.
Senator Van Hollen. Well, thank you, Mr. Chairman, and
thank you for holding this important hearing. Thank you to all
the witnesses.
As we have heard, this new so-called true lender rule
really just opens up the floodgates to rent-a-banks and
predatory lending. I do hope that Congress will muster the
votes to overturn it.
In my State of Maryland, we have laws in place to try to
prevent predatory lenders so they cannot take advantage of
consumers. Under our State law, the maximum interest rate on a
$1,000 loan is 33 percent; on a $2,000 loan it is 24 percent;
on a loan greater than $2,000, it is 24 percent. And yet
through these rent-a-bank schemes, predatory lenders can
essentially evade these caps, launder high-interest-rate loans,
and we are talking about rates 179 percent or higher, and they
can do this just by having a rubber stamp partnership with
these banks, as has been described.
Ms. Stifler, you started to talk about this in response to
Senator Cortez Masto's question, but from your research, have
you seen this resurgence of rent-a-bank schemes? If so, how are
they the same or how are they different from what we saw in the
early 2000s when the OCC and State Attorneys General shut them
down? If you could just go into detail, because some claim that
we are not seeing these problems.
Ms. Stifler. Thank you for the question, Senator Van
Hollen. Yes, we are seeing a reemergence of rent-a-bank
schemes. There have been some rogue banks renting out their
charters over the past few years with a handful of schemes, but
increasingly we are seeing more and more of these schemes
emerging, thanks to the OCC and FDIC recent actions over the
past couple of years. Today's schemes are fundamentally the
same as in the 2000s, early 2000s. The nonbank handled
virtually all of the loan functions, but the bank's name is on
the paperwork as the lender in order to try to get around State
law. Shortly after origination, the nonbank lender buys the
bulk of the financial interest in the loan from the bank, and,
you know, while some of today's schemes might be dressed up a
little bit fancier with a fintech aura than the older schemes,
they still have the same rent-a-back evasion.
The loans we are seeing are still extremely high cost and
extremely predatory. They are made by payday lenders. They may
not be the 2-week loans that perhaps Mr. Brooks is thinking of,
but they are the 18-month loans at $5,000. They are offered in
stores and online, like I mentioned, and, you know, they are
growing. They are also point-of-sale loans, they are car title
loans, and they are high-cost loans that in 45 States plus the
District of Columbia are not legal right now.
Senator Van Hollen. Well, thank you. And, Mr. Stein, just
to follow up on that--and thank you for bring the legal actions
that you are on the grounds of preemption, that this rule
preempts State law and violates the criteria that need to be
applied for any kind of preemption. From your perspective and
the perspective of the States, what has been the experience
with the OCC's preempting State consumer protection laws in the
past? And are there parallels between what is happening now and
what happened in the early 2000s that contributed to the
meltdown?
Mr. Stein. Thank you, Senator Van Hollen. A great question.
This is not the OCC's first gambit at trying to keep States
from looking out for their borrowers. North Carolina was the
first State in the country to pass an antipredatory lending law
back in 1998, and then a number of other States followed. And
these were laws that required an analysis of a borrower's
ability to repay, a prohibition on flipping loans to charge
unnecessary fees, negative amortization--all these things that
led to a surge in dangerous, high-cost, subprime loans
throughout the early 2000s.
We fought back against their preemptive moves, but the
damage was done, and we all lived through the painful Great
Recession that was really sparked by the meltdown of subprime
mortgage lending. That is why you all passed the Dodd-Frank
Act, and that is why you all put restrictions on the OCC's
ability to preempt States, because you had seen that negative
experience.
The OCC is currently flouting the dictates of Congress by
failing to engage in the preemption requirement you imposed on
them, and that is why we urge you all to exercise your
authority under the Congressional Review Act.
Senator Van Hollen. Well, thank you, and I hope we will.
And as you know, Senator Brown and I have filed exactly that
proposal for Congress to act to overturn it. Thank you very
much, all of you, for your testimony.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Van Hollen.
Senator Smith, thank you for allowing Senator Warnock to go
next. I really appreciate that, as I am sure he does, because
he has got somewhere he needs to go. Senator Warnock from
Georgia is recognized for 5 minutes.
Senator Warnock. Thank you so very much, Mr. Chairman.
As Chair of the Subcommittee on Financial Institutions and
Consumer Protection, I am very concerned about this issue. And
I want to make it very clear that I am going to do everything I
can to protect consumers, but especially the most marginalized.
Vulnerable people are the ones who are targeted by these loans.
And this so-called true lender rule, what a misnomer. There is
nothing true about it. It provides an avenue for predatory
lenders to partner with banks to peddle harmful short-term
loans with triple-digit interest rates--triple-digit--in States
that have reasonable and often voter approved caps like North
Carolina on interest rates to protect consumers.
Today nearly 16,000 payday and auto loan stores operate
nationwide. I have seen this up close and firsthand as a pastor
in the Auburn Avenue community in Atlanta, Georgia, and in
other pastorates.
Pastor Haynes, let me begin with you. We have worked on
these issues for years, and I know of your involvement and
advocacy, and we often talk about financial predators who take
advantage of the poor, our most vulnerable sisters and
brothers. In your testimony you shared some of these lived
experiences of many who attend your church, which is
predominantly African-American. Could you briefly talk about
how these rent-a-bank arrangements are affecting both older and
younger generations at Friendship-West Church and in the
surrounding communities? And what do you think of the long-term
economic and wealth consequences for the consumer?
Reverend Haynes. Thank you for the question, Senator
Warnock. As you know, usury is un-Biblical, it is immoral, and
the reason is because of the damage it does to those who are
already economically vulnerable. In the area where I am blessed
to pastor, sadly, within a 3-mile radius you have in excess of
20 payday loan and car title loan stores. At the same time, we
have seen banks vacate that area, and so the payday and car
title loan stores become the options that persons have in order
to make up for being in an underserved area. And, of course,
they find themselves in a debt trap, and that debt trap does so
much damage to the community. It does damage to the family, and
the bottom line is that we are talking about those who are
already vulnerable who live in a community that is underserved
and suffers from being disinvested. And so when you combine all
of that--and earlier, persons were talking about taking away
choices from consumers. And yet when the options are predatory,
you set them up to make choices that will have consequences
that, again, would do damage to the family and further damage
to a community that is already underserved. And, Pastor
Warnock, you can appreciate this. I just do not want Jesus to
say to America in the judgment, ``I was hungry, and you gave me
a payday loan through a rent-a-bank scheme.''
Senator Warnock. Thank you so much, Pastor Haynes, and I
think it is an important point that you make this assumption
about somehow we are providing options when the reality is
people are being ghettoized and channeled and marginalized to
these inferior loan products that set up a cycle of debt.
Ms. Stifler, in your testimony you noted that these types
of lenders disproportionately hit communities of color due to
the long history of racial discrimination within housing,
banking, lending, and employment, often aided and abetted by
some of our Government's own policies.
In addition to passing the Senate Joint Resolution to
overturn this bad rule, what other actions should our Federal
regulators take to close this predatory loophole and lessen its
impact on vulnerable communities?
Ms. Stifler. Senator Warnock, thank you for the question.
Yes, I mean, there are a number of actions that can be taken at
the Federal level, whether it is the regulators or you all in
Congress. I think one of the key policies that could be pursued
is a Federal interest rate ceiling, like I mentioned in my
testimony. While 18 States plus the District of Columbia have
strong interest rate caps on payday loans and they represent
over 115 million people in the country, the rest of the country
is at risk to predatory payday loans. So it is something the
Congress can do and that we support is a Federal interest rate
cap of 36 percent or less.
Senator Warnock. We have to support Senate Joint Resolution
15. This is the start, and there is more work to be done. Thank
you so much for your testimony, and thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Warnock.
Senator Smith from Minnesota is recognized for 5 minutes.
Senator Smith. Thank you, Chair Brown.
So every year in Minnesota, people in Minnesota--and all
across the country--are taken advantage of by financial
institutions, by companies, by individuals acting in bad faith.
And we know researchers and advocates like some that we have
today on this great panel have long criticized payday lenders
for preying on struggling consumers and trapping them in this
cycle of debt. And too often we know that the victims of these
abusive practices are from low-income communities and from
communities of color. People are ripped off, and it is immoral
and disgraceful. In Minnesota, a 2016 analysis showed that
black Minnesotans are twice as likely as Minnesotans as a whole
to live within 2\1/2\ miles of a payday loan store.
So I want to drill in on this in a couple of different
ways. I would like to start with Attorney General Stein. You
joined a group of other Attorneys General, including our
outstanding Attorney General from Minnesota, Keith Ellison, in
filing a lawsuit against the OCC to challenge this so-called
true lender rule. So can you just explain to us whether or not
you think that this so-called true lender rulemakes it easier
for payday lenders to rip off consumers? I mean, that is how it
seems to me. It just makes it easier for them to do this.
Mr. Stein. Senator Smith, thank you. Yes, absolutely, the
effect of this fake lender rule, to be more accurate, is that
payday lenders in States where it is illegal for them to
operate will pay a fee to a national bank for use of its logo
on its paperwork and then engage in payday lending in States to
the detriment of residents where it is not a lawful product.
Senator Smith. So not only does it make it easier for these
payday lenders to rip people off, but it also makes it harder
for you to do your job of protecting consumers, which is part
of what your charter is, your job is as an Attorney General,
right?
Mr. Stein. There is no question. I headed the Consumer
Protection Division in 2001 to 2008. The law banning payday
loan lending went into effect in 2001. It took us 5 years of
vigorous enforcement of State law until we succeeded in chasing
out the last storefronts of payday lenders in North Carolina.
It was hard work, but we succeeded. This new rule will put in
jeopardy all of that hard work.
Senator Smith. So I am struggling to understand, like, why
would we do this? Why would anybody think that it is a good
idea to make it easier to rip people off like this? What is the
justification?
Mr. Stein. Well, greed. I mean, what drives payday lending
is greed. These folks know that they can make money. Ms.
Stifler noted in her comments that the entire business model of
payday lending is not someone repaying the loan. The entire
model is dependent on a percentage of those borrowers never
being able to repay the principal and being on the hook for the
ongoing fees for weeks and weeks and weeks and weeks at a time.
And if everybody repaid their loan and were done after 2 weeks,
the business would not exist.
Senator Smith. Right.
Mr. Stein. It is entirely dependent on those who are
desperate and in a hard way.
Senator Smith. But it seems to me, Mr. Chair, that as
policymakers we should be making it harder and not easier for
payday lenders to prey on people who are trapped in this cycle
of debt, and that we also need to see that these predatory
practices do not just happen randomly across the community,
that they specifically are targeting Black and Brown folks. And
I would really like, in the little bit of time that I have
left, Pastor Haynes, I so appreciate your testimony. And I am
just wondering, as you think about your parishioners and the
community that you serve, how would you connect this rent-a-
bank scheme with other examples in our history of policies and
practices that have discriminated against Black and Brown
people? I mean, specifically we have banks, for example, that
make it harder for Black and Brown people to borrow money, and
then at the same time we make it easier for predatory lenders
like this to come into communities and trap people?
Reverend Haynes. Thank you for that question, Senator
Smith. I will just simply say that, again, we have a history of
redlining Black and Brown communities, and that history now
continues in that in the past, you know, neighborhoods were
targeted or Zip codes were targeted for noninvestment, nonloan,
nonbank opportunities, and now the target is to exploit those
who are already vulnerable. And I think it would be just a
novel concept for the OCC, instead of protecting predators, let
us see to it that banks serve all consumers and all consumers
in a way that is just, fair, and moral.
Senator Smith. Well, I could not agree with you more. I
think that should be the work of this Committee and the work
that we have ahead of us. We need to understand that it is not
an accident of history that this is happening in Black and
Brown communities. This is the design of how things have been
done that we need to break that pattern, and that is what I
look forward to working on.
Thank you very much.
Chairman Brown. Thank you, Senator Smith, for your
questions.
The hearing is drawing to a close. Today's testimony makes
it obvious why we need to overturn the OCC's true lender rule
that enables a new group of payday lenders to resurrect the
same old rent-a-bank scheme. How do we know this is happening?
Just as General Stein pointed out, look at where this new group
of payday lenders is using that strategy. They lend directly in
States with no rate caps, but then use the rent-a-bank strategy
in States where there are limits on the amount of interest they
can charge, conservative States, States that are known to most
of us as pretty Republican, States like Georgia, North
Carolina, South Dakota--Georgia, I would argue; Senator Warnock
might disagree with that.
We heard talk today about how payday lenders say they
provide options. We have heard that over and over, options and
opportunities, but debt traps are not really reasonable
options. We heard a lot today about access to credit and how
overturning this rule might decrease that access. But be clear,
we do want it to decrease access to loans at interest rates so
high they ruin people's lives. That is the whole point of the
hearing, the whole point of our CRA resolution.
I would ask anyone who wonders if we really should be
cracking down on these predatory lenders to listen to the
testimony from workers we had on this Committee yesterday. We
listened to five workers talk about their lives. They were
diverse geographically, racially, gender. They talked about
their struggles, and part of that is their struggles with debt
when they are low-wage workers and are having difficulty. They
have worked hard their whole lives. That hard work has never
paid off like it should. If you believe in the dignity of work,
you work hard, you ought to be able to get ahead.
One worker, a woman from southern West Virginia, said,
``They call me the working poor, but,'' she said, `` `working'
and `poor' should not be in the same sentences.''
If we are concerned too many people cannot afford a car
repair or a medical bill or another emergency, the solution is
not to trap them in a cycle of debt. It is to raise their
wages.
So thank you all, all five of you, for testifying, for
being here today.
For Senators who wish to submit questions for the record,
these questions are due 1 week from today, on Wednesday, May
5th, so please abide by that.
For our witnesses, we ask you within 45 days to respond to
any of these questions. Thank you again, all of you, for being
here.
The Committee is adjourned. Best wishes. Thank you.
[Whereupon, at 11:36 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
Emerson teaches us that history is a battle between what he called
``the innovators'' and ``the conservators.'' The innovators work to
find new ways to make Government work for the people it serves, and
deliver results for everyone.
But the conservators--the corporations, the special interests, the
elite who've amassed wealth and power at the expense of workers and
their families--the conservators never give up.
And so it is with predatory lending.
In the late 1990s, payday lenders were desperate to find a way to
evade State laws that limited them from charging exorbitant interest
rates that trap people in a cycle of debt they can't get out of, no
matter how hard they work.
They came up with what the OCC called ``rent-a-charter''--what we
now know as the ``rent-a-bank'' scheme.
Because banks are generally not subject to these State laws, payday
lenders funneled their loans through a small number of willing banks.
It looked like the banks were making the loans, when it was really the
payday lenders.
Federal regulators, Republicans and Democrats, saw through this
ruse.
Under President Bush, the OCC described these rent-a-bank schemes
as ``abusive,'' and later warned about banks that ``rent out their
charters to third parties who want to evade State and local consumer
protection laws.''
In the years that followed, the OCC and FDIC shut down a series of
these schemes by payday lenders and banks.
States from across the country also stepped in to crack down.
The Georgia legislature, in 2004, passed a law to crack down on
rent-a-bank schemes. Regulators in West Virginia, Ohio, Pennsylvania,
New York, Maryland, and other States followed suit.
States also passed new laws to limit interest rates on payday
loans.
Since 2010, Montana, South Dakota, Colorado, Illinois, Virginia,
and just last year Nebraska, all passed laws to cap interest rates on
payday loans at 36 percent--still a very high number that will make any
company plenty of money.
Several other States, including California and my home State of
Ohio, also passed laws to limit the interest that can be charged on
consumer loans.
These new laws passed with overwhelming, bipartisan support.
More than 75 percent of voters in Nebraska and South Dakota
supported the ballot initiatives to cap interest rates on payday loans.
In recent years, new fintechs have emerged that partner with banks
to offer responsible small-dollar loans at affordable rates.
Of course the payday lobby didn't give up.
And now we have a separate group of online payday lenders
resurrecting the same old rent-a-bank scheme. They aren't even
attempting to hide it.
One online lender recently told its investors that it would get
around California's new law by making loans through ``bank sponsors
that are not subject to the same proposed State level rate
limitations.''
Another one said ``There's no reason why we wouldn't be able to
replace our California business with a bank program.''
Given the broad, bipartisan support for these laws, we all hoped
that the Trump OCC would take action and crack down on these
schemesschemes that have been rejected by voters and legislatures in
State after State.
The last Republican administration under President Bush stood up
for consumers on this point.
But last year, the OCC issued what's known as the True Lender Rule,
overruling voters of both parties and giving a free pass to these
abusive rent-a-bank schemes.
The rule was rushed through by the Acting Comptroller who cut his
teeth helping banks ruthlessly foreclose on homeowners and a Deputy
Comptroller with deep ties to the payday lobby--and whom Republicans
have selected to be witnesses at today's hearing.
The OCC and Mr. Brooks have argued that the True Lender rule is
necessary so that the agency has the necessary authority to oversee
banks relationships with payday lenders.
But that's just not true--the OCC didn't lack any authority when it
cracked down on rent-a-bank schemes in the early 2000s.
The OCC also attempted to justify its efforts by claiming that it
promotes ``innovation'' and provides ``certainty'' to the markets.
The only certainty we need is the certainty that workers and their
families will be protected from exorbitant, exploitive interest rates.
And the last thing we should be doing is encouraging payday lenders
to, in their words, ``innovate''--we know that just means new ways to
get away with ripping people off.
That's why across the country, a broad, bipartisan coalition is
asking Congress to overturn the OCC's harmful True Lender Rule.
That support includes:
the National Association of Evangelicals,
the Southern Baptist Convention,
and other members of the Faith in Just Lending Coalition.
That coalition wrote to Congress, quote: ``Predatory payday and
auto title lenders are notorious for exploiting loopholes in order to
offer debt-trap loans to families struggling to make ends meet. The
OCC's `True Lender' rule creates a loophole big enough to drive a truck
through.''
I'd also like to submit the entire letter for the record, along
with letters from a bipartisan group of State attorneys general, State
bank regulators, and a coalition of 375 consumer, civil rights, labor,
and small business organizations asking Congress to overturn the True
Lender Rule.
Today we'll hear from one of the members of that faith coalition,
Dr. Frederick Haynes, senior pastor of Friendship-West Baptist Church
in Dallas, Texas.
We'll also hear today from North Carolina Attorney General Josh
Stein.
General Stein represents a bipartisan coalition of State attorneys
general, including the Republican attorneys general in Nebraska and
South Dakota, who have called on Congress to overturn the OCC's True
Lender Rule.
Like so much we do, this comes back to one question: whose side are
you on?
You can stand on the side of online payday lenders that brag about
their creativity in avoiding the law and finding new ways to prey on
workers and their families.
Or we can stand up for families and small businesses, and the State
attorneys general and State legislatures who have said ``enough'' and
are trying to protect themselves and their States from predatory
lending schemes.
Some issues that come before this committee are complicated, they
divide people, there are thorny nuances to consider. This isn't one of
them. It's simple: Let's stop predatory lenders instead of encouraging
them.
______
PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
Thank you, Mr. Chairman.
In the last decade, we have seen financial technology companies--
fintechs--driving new innovations in the financial markets. Fintechs
have had remarkable successes in developing technology-oriented
solutions to meet consumer needs.
As many banks have exited the personal loan market fintechs have
filled the gap, increasing their consumer lending by 72 percent between
2005 and 2018. Today, they issue nearly 40 percent of all unsecured
personal loan balances.
In recent years, both nationally chartered and State-chartered
banks and credit unions have begun to partner with fintechs to offer
improved products and reach more consumers. This is particularly
beneficial for community banks, who lack resources to develop banking
technology. In fact, 65 percent of community banks consider fintech
partnerships important to their business strategy.
These partnerships also generate significant consumer benefits.
Bank-fintech partnerships generate efficiencies that can lower the
price of financial products, expand consumer choice, and increase
competition. Bank-fintech partners offer a large variety of credit
products--not just small-dollar loans--including credit cards, home
equity lines of credit, personal loans, auto loans, mortgages, and
small business loans.
Unfortunately, recent court rulings have applied differing legal
tests to determine which partner in these relationships is the true
lender who is legally responsible for the loans. These tests have
created uncertainty that threaten to reduce access to credit for
consumers, especially for riskier borrowers. That's why there has been
bipartisan Congressional support and industry support for clarifying
this issue.
Last year, the OCC issued its True Lender rule to provide this
much-needed regulatory clarity. This rule holds a national bank
responsible for a loan when, at the time the loan is originated, it is
named in the loan agreement or it funds the loan. This allows the OCC
to supervise these loans and ensure the bank is not evading the law,
including Federal consumer protection laws.
Contrary to what some claim, this rule is not intended to
facilitate ``rent-a-charter'' arrangements where banks don't comply
with the law. In fact, the OCC's rule does just the opposite. As the
OCC has explained, in a rent-a-charter arrangement ``a bank receives a
fee to `rent' its charter and unique legal status to a third party . .
. to enable the third party to evade State and local laws . . . and to
allow the bank to disclaim any compliance responsibility for the
loans.''
In other words, a ``rent-a-charter'' arrangement means no party
takes compliance responsibility for a loan. That's where the True
Lender rule comes in. It ensures that national banks that partner with
third parties are accountable for the loans they issue through these
partnerships, and allows the OCC to supervise the origination of these
loans.
You don't have to take my word for it. The current Acting Director
of the OCC--who has been a career civil servant for more than 30
years--recently wrote to Congress making this very point.
The True Lender rule also provides the clarity needed for bank-
fintech partnerships to flourish and for national credit markets to
function. For over four decades, Federal law has allowed both
nationally chartered and State-chartered banks to ``export'' the State
law governing interest rates from the home State where they are based.
This allows the bank to comply with the law of the one State where
the bank is located, rather than the 50 different States where its
customers are located, in order to facilitate an interstate market for
credit. The True Lender rule allows fintechs to partner with banks,
which already operate with these efficiencies.
Uncertainty about who the true lender is creates uncertainty about
whether the bank can export its interest rate. If the bank guesses
wrong, the loan could be unenforceable. This uncertainty jeopardizes
the viability of bank-fintech partnerships. More importantly, it also
disrupts the functioning of the secondary market for credit.
Why does the secondary market matter? When a bank sells a loan it
frees up capital to make more loans. Perhaps the best-known
illustration is mortgages. When a bank sells a mortgage to the GSEs it
frees up capital to lend to additional homebuyers. The same principle
applies to the secondary market here.
Banks will likely issue far fewer loans if they cannot reliably
sell them into the secondary market. Fewer loans means less access to
credit; less access means higher costs and less willingness to provide
the limited supply of credit to higher-risk borrowers. The result? The
most marginalized consumers are hit the hardest.
This isn't just my opinion. Almost 50 leading financial economists
from prominent universities--including Harvard, Stanford, and the
University of Pennsylvania--made these very points in an amicus brief
in support of the OCC's True Lender rule.
We have empirical evidence, too. Studies have shown that after a
2015 court ruling created uncertainty around the ability to export
interest rates to New York, it became significantly harder to get loans
in New York, especially for higher-risk borrowers.
Despite the importance of the True Lender rule, some Democrats want
to rescind it using the Congressional Review Act. The rationale appears
to be that overturning the rule may subject more loans to State
interest rate caps.
However, price controls are not the answer. They exclude people
from the banking system. Price controls restrict the credit supply and
make it harder for low-income consumers to access needed credit.
The best form of consumer protection is a robust, competitive
market. Preserving the regulatory certainty and clarity the True Lender
rule advances that cause.
______
PREPARED STATEMENT OF JOSH STEIN
Attorney General, State of North Carolina
April 28, 2021
Mr. Chairman and Members of the Committee, my name is Josh Stein,
the Attorney General of North Carolina. I am pleased to have this
opportunity to discuss the OCC's so-called True Lender Rule. This rule,
if not reversed, provides a get-out-of-jail-free card to predatory
lenders who violate State laws limiting interest rates and fees on
consumer loans.
Many States set rate caps on consumer loans. For instance, in my
home State of North Carolina, the maximum legal rate for consumer loans
under $4,000 is 30 percent. These State consumer protection lending
laws enjoy broad and bipartisan support, not only in North Carolina but
across the country. For example, in the 2020 election, more than 82
percent of Nebraska voters approved a ballot measure to cap interest on
payday loans at 36 percent. South Dakota voters approved a similar
measure in 2016. Many of these lenders in our States are licensed,
well-regulated, and compliant with State usury laws.
However, for as long as States have protected their resident
borrowers from predatory lenders, those lenders have sought to evade
State laws. Greed is a powerful motivator. One of their favorite ruses
in recent decades has been to dress up the paperwork of their loans to
make them look to be made by an entity exempt from State usury law,
such as a national bank regulated by the OCC.
The courts have long recognized and outlawed these subterfuges that
put form over substance. A longstanding legal principle, dating as far
back as a 1835 U.S. Supreme Court opinion written by Chief Justice
Marshall, demands an ``examin[ation] into the real nature of the
transaction'' to determine whether a loan violates usury laws.
Many States including my own have incorporated Chief Justice
Marshall's reasoning into their State law through the ``true lender''
doctrine (or sometimes called the ``de facto lender'' doctrine). It is
a principle of State law that typically looks to whether a predatory
lender retains the ``predominate economic interest'' in the loan to
determine whether the predatory lender is the loan's true lender and
therefore must comply with State rate caps.
North Carolina and other States have relied on the ``true lender''
doctrine to combat the illegal schemes of modern predatory lenders.
North Carolina has a long history of strong laws and vigorous
enforcement against payday lending. For a brief experimental period,
from 1997 to 2001, North Carolina law allowed payday loans, and our
State became home to 10 percent of the payday loan storefronts in the
Nation with a heavy concentration in neighborhoods of color and near
military bases. During that time period, we learned firsthand the
economic damage these loans inflict on working families. The median
loan was for $244 for a period of 8-14 days at an APR of 419 percent.
The average borrower got more than 8 loans from the same store, and one
out of seven borrowers took out more than 19 loans per year. These
loans were not a source of occasional credit as their marketing
suggested but rather a debt treadmill from which borrowers had trouble
escaping; for a person struggling to keep their head above choppy
financial waters, the loans were not a life preserver but an anvil.
Let me tell you briefly about Arthur Jackson (not his real name), a
warehouse worker and grandfather of 7, who lives in Raleigh, NC, went
to the same Advance America payday store for over 5 years. He got a
single $200 loan, that was later increased to $300. Advance America
flipped the same loan over 100 times, collecting $52.50 for each
transaction, while extending him no new money. He ended up paying
interest of over $5,000 for the loan, fell behind on his mortgage, and
had to file for bankruptcy to save his home.
Lisa Terry, from Winston-Salem, NC, was a single mother making less
than $8 an hour. She went to a payday store and got a $255 loan. Two
weeks later, like so many borrowers, she didn't have the funds to pay
it off, so she renewed or ``rolled over'' the loan. She paid renewal
fees every 2 weeks for 17 months--paying $1254 in fees alone--without
paying down the loan. She thought she was getting new money each time,
not realizing that she was simply borrowing back the $300 she had just
repaid. She said, ``I felt like I was in a stranglehold each payday.
After a while, I thought, `I'm never going to get off this merry-go-
round.' I wish I'd never gotten these loans.''
Finally, Anita Monti, a 61 year old grandmother from Garner, made
$9 an hour working second-shift at computer hard drive manufacturer.
She wanted to buy her five grandchildren presents for Christmas, but
she was living paycheck to paycheck. She went to an Advance America
store and borrowed $300, less a $45 fee. In two weeks, she didn't have
the money she owed, and her electric bill was due. So, she borrowed
another $300, not realizing it was the same $300 over again. Only after
getting a raise to $12 an hour and scrimping on food was she able, a
year later, to pay the almost $2,000 in fees she paid week after week
to get that $300 loan. As she said, ``I needed the cash to get through
the week. It didn't cross my mind that I was borrowing back my own
money.''
Due to the exorbitant interest rates of the loans and patterns of
harmful, repeat borrowing that buried in debt thousands of North
Carolinians like Arthur, Lisa and Anita, North Carolina's legislature
allowed the law to sunset in September 2001. After the sunset, most
payday lenders complied with the law and closed their doors. However,
others looked for ways to circumvent North Carolina law through
subterfuges, including rent-a-bank schemes. In particular, several
national payday lending chains, including ACE Cash Express and Advance
America, reached out to a few rogue national and State-chartered banks
[including Goleta National Bank, Peoples National Bank of Paris
(Texas), Republic Bank & Trust (of Kentucky) and First Fidelity Bank of
Burke (South Dakota)] to which North Carolina's interest rate caps did
not apply.
The banks' names were placed on the loan documents identifying the
banks as the lenders, and the payday lenders continued making loans at
sky-high interest rates of up to 521 percent to North Carolina
consumers. The payday lenders contended, based on the loan documents,
that they were no longer lenders--and that they were instead the
``marketing, processing, and servicing agents'' of the banks. Very
notably, the payday lenders only used these ``rent-a-bank'' schemes in
States like North Carolina that prohibited payday lending; in other
States that allowed these high-rate loans, the payday lenders made the
loans in their own names.
The North Carolina Attorney General's office under then Attorney
General, now Governor, Roy Cooper took action against these schemes. I
directed the Consumer Protection Division at that time. We asserted
that the payday loans were covered by the true lender doctrine, which
has been an integral part of North Carolina law since the 1800s. In
February 2005, together with the Office of the North Carolina
Commissioner of Banks, we brought an enforcement action against Advance
America, which had continued its rent-a-bank arrangements.
In December 2005, the Commissioner of Banks held that Advance
America was, in fact, engaged in the business of lending in North
Carolina and was therefore subject to North Carolina usury law. Advance
America stopped making loans in North Carolina. Subsequently, in March
2006, three other large payday lending chains, Check Into Cash, Check
`n Go, and First American Cash Advance, all of which had used out-of-
State banks, also agreed to stop making payday loans in North Carolina.
North Carolina is by no means alone in protecting borrowers; other
States have also relied on the true lender doctrine, as adopted in
their State's common law, to stop payday lenders from using sham rent-
a-bank schemes to evade States' interest rate laws. Examples of States
that have taken action against rent-a-bank schemes in the last two
decades using the true lender doctrine include, among others, Colorado,
the District of Columbia, Georgia, New York, Ohio, Pennsylvania, and
West Virginia. In each of these cases, the sole purpose for the payday
lenders' entering into arrangements with the banks was, or is, to make
loans to our States' residents at rates that are unlawful. There is no
other purpose, because these lenders can, and do, make loans in their
own name in States where they can--thus, these ``rent-a-bank''
arrangements are a blatant sham to evade State laws.
The OCC's new, so-called True Lender Rule will upend States'
ability to protect their people. In fact, calling it the ``True Lender
Rule'' is an upside down farce; it is more accurate to call it the
``Fake Lender Rule'' because it overturns the true lender doctrine
developed by States. It allows predatory lenders to avoid State rate
caps by slapping the name of a national bank on the loan's paperwork.
This is literally taking the paper form and elevating it over the
loan's substance. Under the rule, it does not matter that the predatory
lender in a rent-a-bank scheme retains the ``predominate economic
interest'' in the loan.
The OCC, through the Acting Comptroller, not only rammed through
the Fake Lender Rule one week before the 2020 election, but it did so
unlawfully. The OCC radically exceeded its statutory authority in
issuing the rule. Although the OCC purports to be interpreting portions
of three Federal banking laws, none of them authorize rent-a-bank
schemes or give the OCC authority to preempt the State law true lender
doctrine.
The rule is also unlawful because the OCC ignored the centuries of
court decisions recognizing and refining the true lender doctrine. The
OCC's interpretation as set forth in the rule is unreasonable because
it supplants well established court precedent established over
centuries with an artificial and unprecedented standard. Reputable
lenders submitted comments to the OCC warning the rule may create legal
confusion for various types of standard lending arrangements, but the
OCC refused to address those concerns. Indeed, the OCC has never
identified a single court or regulator that has used the standard it
adopts in the rule.
The rule's endorsement of predatory lenders' ruses unlawfully
ignored the OCC's own historical opposition, under the Clinton, Bush,
and Obama administrations, to rent-a-bank schemes and to the prospect
of abusive, triple-digit interest-rate loans being made to financially
distressed consumers in States that expressly forbid such loans. In the
early 2000s during the Bush administration, consistent with its
guidance, the OCC took action against at least four national banks that
had entered into rent-a-bank schemes with nonbank payday lenders; the
OCC's orders required the national banks to terminate their
partnerships with the payday lenders and to cease making the loans.
And, as recently as 2018, in small dollar loan guidance the OCC
declared that it ``views unfavorably an entity that partners with a
bank with the sole goal of evading a lower interest rate established
under the law of the entity's licensing State(s).'' However, shortly
before promulgating the Fake Lender Rule, the OCC inexplicably withdrew
that guidance and is now implicitly, if not explicitly, supporting
rent-a-bank schemes with this new rule.
This new rule is galling not only because it ignores court and
administrative precedent, but also because the OCC flouted the commands
of Congress in finalizing it. In the Dodd-Frank Act, Congress required
the OCC to adhere to strict procedural requirements before preempting
State consumer protection laws to prevent the OCC from repeating its
horrendous record on preemption that led to the Great Recession. But in
issuing the Fake Lender Rule, the OCC refused to comply with the
procedural requirements mandated by Congress.
State attorneys general from California, New York, Colorado, the
District of Columbia, Massachusetts, Minnesota, New Jersey, and North
Carolina filed a lawsuit in the Southern District of New York
challenging this rule. We are optimistic about our ability to reverse
the rule through litigation.
That said, I urge Congress to exercise its power under the
Congressional Review Act to reign in a rogue OCC that believes it can
disregard Congressional mandates. The congressional review process
provides a far more straightforward means to reverse the Fake Lender
Rule than litigation and the potential years it will take to secure a
final court ruling. I am pleased that a bipartisan group of 25
Attorneys General, including General Rutledge of Arkansas, General
Peterson of Nebraska, and General Ravnsborg of South Dakota, recently
urged Congress to disapprove this new rule under the Congressional
Review Act because it will facilitate predatory lending in our States.
Protecting our constituents is our highest calling. Playing a small
role in running out of my State the payday lenders that abused hard-
working people like Arthur, Lisa, and Anita is something I take immense
pride in. As Senators, you have the authority to help people like them
all across this country. It is an awesome power, and I ask that you
exercise it.
______
PREPARED STATEMENT OF LISA F. STIFLER
Director of State Policy, Center for Responsible Lending
April 28, 2021
______
PREPARED STATEMENT OF REVEREND DR. FREDERICK D. HAYNES, III
Senior Pastor, Friendship-West Baptist Church, Dallas, Texas
April 28, 2021
Good morning Chairman Brown, Ranking Member Toomey, and Members of
the United States Senate Committee on Banking, Housing, and Urban
Affairs. I am Frederick Douglass Haynes, III. I serve as Senior Pastor
of Friendship-West Baptist Church, a congregation of 12,000
parishioners in Dallas, Texas.
I am grateful for the opportunity to come before you to speak on
behalf of a broad and diverse faith community to morally appeal to you
to see how important it is to stop those who would use their greed to
exploit those in need through high-cost predatory debt traps that we,
of many faith traditions, overwhelmingly consider usury.
Usury and economic exploitation of the poor are condemned in all
faith traditions. Those who exploit the poor through predatory
practices are referred to as ``wolves'' in the scriptures. The
predatory practitioners of ``Rent-A-Bank'' schemes may well be referred
to as wolves dressed up in the legitimacy of a bank. The victims of
such practices, however, testify that an economic predator by any other
name is still trapping the desperate in debt. These ``moral monsters,''
to use the language of James Baldwin, feed their greed at the expense
of the vulnerable.
For us, it is a simple matter of right and wrong, and we strongly
oppose the Office of the Comptroller of the Currency's plan to enable
predatory lenders to ignore State interest rate caps by paying a bank
willing to masquerade as the ``true lender.'' A few rogue banks are
already participating in these exploitative agreements, and the OCC's
rule would certainly bless the arrangement of laundering predatory
loans and allow such devious schemes to proliferate.
For many years, people of faith have come together and made a
priority of challenging debt traps clad in deceptive wardrobes ranging
from the crass quick-cash neon signs that litter the neighborhoods of
the needy, to the polished promises of ``fintech'' lenders who claim to
be the saviors of families who need ``access to credit,'' and the
regulators who agree.
The con, of course, is that the ``access'' they impose on these
families is a deceitful dead end to a debt booby trap, as they aim to
draw them into a machine calibrated to siphon funds from their bank
accounts until they have all but bled them dry. In many cases, their
harm goes beyond reaping fees several times the dollar amount of their
customer's original loan to forcing a closed account, and thus sinking
that family into a sea of bad credit options and ending their access to
mainstream banking services. Many must file bankruptcy due to the moral
bankruptcy of the predatory lenders, who make them pay a high cost for
being poor.
I have seen the real-world impact of these debt traps on the lives
of my parishioners far too often. A grandmother who had recently lost
her husband and needed cash for medicine took a $300 loan, and
responsibly paid it off. But not before the debt trap machine did what
it was designed to do and rolled her over several times, until she had
paid back $800 for that $300 loan.
Another of my congregants, a recent college graduate, worked two
jobs to make ends meet. When his mother became sick, he had to choose
between paying his car loan and her medication and utilities. He took
out a payday loan believing it would help him get through the crunch,
but an interest rate of 450 percent set him up to bring him down
financially, and he ended up losing the car he needed to get to work.
Unfortunately, these are just two of many examples of persons who
experienced the ``soul killing'' of working hard for so little, while
coming up short and needing an extension that dug them deeper into
debt.
This clearly harmful and underhanded practice is played out in
congregations of all faith traditions all across the country, and in
communities that are already economically bereft, and underbanked.
Predatory payday, car title lender and installment lenders rob
financially vulnerable people of billions in fees every year, by
replicating a dreadful, disadvantageous practice and hiring lobbyists
to put a halo on their devilment for lawmakers and regulators.
Faith leaders across Christian, Jewish, and Muslim traditions have
for decades been compelled to join together in the battle against usury
and predatory lending debt traps. Faith groups representing 118 million
Americans mobilized to call on the Consumer Financial Protection Bureau
to enact a strong rule addressing the inimical systems of payday
lending debt traps; and have been up in arms again as the rule faces
threats.
I am a part of a coalition of conscience, Faith for Just Lending,
that includes Christian denominations from the right to the left and
across the broad middle who are bound together in opposition to
predatory lending and inspired by a vision of fair and just financial
practices that serve the dignity of all of our American families. The
coalition includes Catholic Charities USA, Center for Public Justice,
Cooperative Baptist Fellowship, Ecumenical Poverty Initiative, Ethics &
Religious Liberty Commission of the Southern Baptist Convention, Faith
in Action (formerly PICO National Network), National Association of
Evangelicals, National Baptist Convention USA, National Latino
Evangelical Coalition, The Episcopal Church, and United States
Conference of Catholic Bishops, to name a few.
I am especially appalled by the harm done to communities that face
historic divestment, who are exploited and suffer from economic
injustice. These communities have historically been crippled by
redlining and now they are being ripped off by the social violence of
financial predators. For decades banks used maps to deny loans to
communities of color and now they are using maps to serve as loan
sharks of those same communities. We know that payday lenders have a
history of setting up shop in Black and Brown neighborhoods; we have
seen this firsthand in the community surrounding our church, and
research bears it out. Now these payday lenders are shifting to online
loans through rent-a-bank schemes and targeting the same struggling
communities.
That the OCC would open up our communities to more exploitation at
a time when we are suffering so severely from COVID-19 and its economic
impact is immoral and disgraceful, especially when we have seen some of
these predatory lenders get Paycheck Protection Program (PPP) relief
funds that kept their debt traps functioning through the crisis. That
the OCC would make a rule giving predatory lenders a way to charge 200-
400 percent interest and more, even in States that have fought hard to
stop this predation with a 36 percent interest rate cap--that is indeed
obscene, and as we would put it in my faith community, sinful and
demonic.
I offer with my testimony, letters from the Faith for Just Lending
coalition and the Faith & Credit Roundtable calling for a repeal of the
OCC's rule. All are engaged with efforts to end poverty; and are deeply
concerned about the impact of the rule on our hardworking families and
our financially vulnerable communities. The States have the authority
and the responsibility of protecting consumers from predatory lenders,
and Congress and the OCC must respect that authority.
We ask for your recognition of the vast, deep financial harm
predatory lending causes along with the hurt and disruption it causes
to families. We ask for you to follow the model of Jesus and announce,
``Good news to those made poor by economic exploitation'' and pass a 36
percent cap. There is a way to provide access to credit without
engaging in legalized loansharking.
We ask, finally, for your strong and proactive support of the
Congressional Review Act that will overturn the OCC's true lender rule,
and remember the wisdom of Thomas Piketty who warns, ``When private
interests exceed the interest of the public, we cease to be a republic
or a democracy.''
Thank you for the opportunity to share my testimony today. I look
forward to answering any questions you may have.
PREPARED STATEMENT OF BRIAN P. BROOKS
Former Acting Comptroller of the Currency
April 28, 2021
Introduction
Chairman Brown, Ranking Member Toomey, and Members of the
Committee, thank you for the opportunity to appear before you today to
discuss the Office of the Comptroller of the Currency's (OCC's) True
Lender Rule and its importance for access to credit, bank balance sheet
management, and the safety and soundness of the banking system.
It is important to note at the outset that the True Lender Rule \1\
was adopted by the OCC following the earlier implementation of the
separate ``valid when made'' rule. \2\ ``Valid when made,'' discussed
more fully below, was adopted along substantially similar lines by both
the OCC and the Federal Deposit Insurance Corporation (FDIC). \3\ While
a Congressional Review Act resolution has been filed in the House of
Representatives and the Senate with respect to the True Lender Rule,
the time period for filing any such resolution with respect to the
earlier ``valid when made'' rule elapsed some time ago. That means that
the rule today is that both national banks (under the OCC's rule) and
State banks (under the FDIC's rule) may originate loans at an interest
rate lawful under the law of the State where the bank is located, and
may sell such loans to nonbank investors, without regard to interest
rate caps in the State where the borrower or downstream investor is
located. Nullification of the True Lender Rule will not change that. As
explained below, the purpose of the later-adopted True Lender Rule is
simply to clarify when a bank is the true lender with respect to a
particular loan and provide a bright line as to when OCC examination
and enforcement authority applies to ensure compliance with consumer
protection and other legal requirements with respect to the loan. Since
the ``valid when made'' rule will continue in force in any event, it is
important to consider the potential negative effects of undoing a rule
whose purpose is to ensure that banks exercising their authority under
``valid when made'' principles comply with legal requirements when they
engage in secondary market transactions.
---------------------------------------------------------------------------
\1\ 85 FR 68742 (Oct. 30, 2020).
\2\ 85 FR 33530 (June 2, 2020).
\3\ See 85 FR 44146 (July 22, 2020).
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``Valid When Made,'' Secondary Markets, and Access to Credit:
Increasing Credit Availability to Low- and Moderate-Income
Americans by Allowing Banks to Leverage Their Balance Sheets
Through Fintech and Other Partnerships
The total demand for consumer credit in the United States far
exceeds the amount of bank balance sheets dedicated to that business
segment. \4\ Moreover, State interest rate caps historically made it
harder for residents of some States to access credit than residents of
other States. Congress and the Supreme Court have addressed these
problems in two ways. First, the Supreme Court's 1978 decision in
Marquette Nat'l Bank of Minneapolis v. First of Omaha Serv. Corp. \5\
and Congress' 1980 enactment of the Depository Institutions
Deregulation and Monetary Control Act allowed both national and State
banks to export their home State's interest rate to customers in other
States. Marquette reached a bipartisan result. The case was
successfully argued by Robert Bork, and Justice William Brennan
authored the decision for a unanimous Court. Congress' decision to
expand the Marquette rule on interest rate exportation to State banks
as well as national banks was similarly bipartisan, passing with an
overwhelming majority of both Democrats and Republicans and signed into
law by President Jimmy Carter. In short, in the inflation crisis of the
late 1970s, when the prime rate peaked at 21.50 percent and some States
had 8 percent usury caps, American leaders of all political stripes
understood the importance of allowing State interest rate exportation
to improve access to credit.
---------------------------------------------------------------------------
\4\ https://www.federalreserve.gov/releases/g19/current/
\5\ 439 U.S. 299 (1978).
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The second way Congress addressed the inadequacy of bank balance
sheets to address all consumer loan demand is in empowering national
banks to sell their loans to third parties. The National Bank Act
provides that banks may enter into contracts, and the Supreme Court has
held consistently for almost 200 years that banks' contracting powers
specifically include the power to sell and assign their interest in
loans to investors. \6\ The implication for credit access is clear:
When a bank sells a loan, it frees up balance sheet to make the next
loan. This is true when a bank sells a consumer loan to a marketplace
lender; when a bank sells a mortgage to one of the GSEs; or when a bank
securitizes its credit card receivables. The principle is the same:
Banks tap secondary market investors to sell loans and use the proceeds
to make more loans. If we think access to credit is a good thing--and
Federal Reserve research shows that countries with more widely
available credit have lower poverty rates \7\--it follows that letting
banks make more loans rather than less is desirable.
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\6\ See Planters' Bank of Miss. v. Sharp, 47 U.S. 301 (1848).
\7\ See, e.g., https://www.dallasfed.org/-/media/documents/
research/eclett/2006/el0610.pdf.
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This idea was called into question in the 2015 Second Circuit Court
of Appeals decision in Madden v. Midland Funding LLC. \8\ In marked
contrast to the bipartisan consensus of the late 1970s surrounding
interest rate exportation, some advocates cheered Madden for enforcing
a State usury law and protecting consumers from high interest rates.
But the reality of that ``protection'' was far murkier. Multiple
studies of the effect of Madden on credit markets found that, when
unable to sell higher interest rate loans to investors, banks focused
their lending activities on smaller loans to wealthier and higher-
credit-score consumers. \9\ One study found that banks in the States
subject to the Madden ruling reduced lending to LMI borrowers by an
astounding 64 percent. \10\ In short, the available evidence showed
that enforcing a State usury limit against a bank-originated loan did
not make credit less expensive for LMI borrowers; it made credit less
available. This evidence is supported by the analysis of numerous
economics and finance professors who submitted a brief amicus curiae in
support of the OCC's position in litigation brought by the State of
California and others seeking to challenge the ``valid when made''
rule. \11\
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\8\ 786 F.3d 246 (2d Cir. 2015).
\9\ See Colleen Honigsberg et al., ``How Does Legal Enforceability
Affect Consumer Lending? Evidence from a Natural Experiment'', 60 J.L.
& Econ. 673, 675 (2017) (cited in McShannock v. JP Morgan Chase Bank,
N.A., No. 19-15899 (9th Cir. 2019)).
\10\ See Piotr Daniesewicz and Ilaf Elard, ``The Real Effects of
Financial Technology: Marketplace Lending and Personal Bankruptcy'' 22
(2018), https://tinyurl.com/y5s3s7oh.
\11\ See https://www.occ.gov/publications-and-resources/
publications/economics/hamiltons-corner/amicus-brief.pdf.
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Madden was at a minimum a legally debatable decision and not in
line with either preexisting precedent nor later authorities. In 2005,
another Federal court of appeals held that ``the assignee of a debt . .
. is free to charge the same interest rate that the assignor . . .
charged the debtor . . . even if the assignee does not have a license
that expressly permits the charging of a higher rate.'' \12\ During the
Obama administration, the Solicitor General opined that the Madden
court ``erred in holding that State usury laws may validly prohibit a
national bank's assignee from enforcing the interest-rate term of a
debt assignment that was valid under the law of the State in which the
national bank is located.'' \13\ And just last year the U.S. Court of
Appeals for the Ninth Circuit criticized Madden at length in holding
that another State law that impaired the ability of national banks to
sell loans in the secondary market was preempted. \14\
---------------------------------------------------------------------------
\12\ Olvera v. Blitt and Gains, P.C., 431 F.3d 285, 286, 289 (7th
Cir. 2005).
\13\ https://www.justice.gov/sites/default/files/osg/briefs/2016/
06/01/midland.invite.18.pdf
\14\ McShannock v. JP Morgan Chase Bank NA, https://
cdn.ca9.uscourts.gov/datastore/opinions/2020/09/22/19-15899.pdf.
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The True Lender Rule: Providing Clarity Necessary To Allocate
Responsibility for Legal Compliance
While the OCC and FDIC ``valid when made'' rules clarified
established law regarding banks' powers to sell loans in the secondary
market without jeopardizing the enforceability of the relevant
interest-rate terms, it did not specify when the bank was the legal
originator of the loan and when a fintech, marketing partner, or other
nonbank company was the legal originator. The purpose of the True
Lender Rule is to provide clarity on that question.
Prior to the True Lender Rule, courts employed a variety of
subjective multifactor balancing tests to determine who the true lender
was with respect to a given loan transaction. In New York and
Connecticut, the States subject to the Madden decision, the question
was irrelevant because even if a bank actually originated the loan the
interest rate became unenforceable following sale to a nonbank
investor. But outside those States, the complicated question of who is
the true lender consumed enormous litigation resources to resolve in
any given case. In some cases, courts held that a bank was the true
lender and thus upheld the enforceability of the transaction against a
usury challenge. \15\ In other cases presenting similar circumstances,
courts held that the bank's involvement was not sufficient to make it
the true lender and held the transaction to violate State usury laws.
\16\
---------------------------------------------------------------------------
\15\ See, e.g., Beechum v. Navient Solutions, Inc., 2016 WL
5340454 (C.D. Cal. Sept. 20, 2016).
\16\ See, e.g., CFPB v. CashCall, Inc., 2016 WL 4820635 (C.D. Cal.
Aug. 31, 2016).
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One purpose of the True Lender Rule was to eliminate the
uncertainty caused by subjective multifactor balancing tests--
uncertainty that had the potential to seriously disrupt secondary
markets (including securitization markets) for consumer loans and
reduce access to credit, particularly among those who need it most. It
did not seem controversial to simply answer the question of whether the
bank or another party was in fact the true originator of a loan. But
another purpose of the True Lender Rule was to address allegations
about ``rent-a-charter'' schemes. While ``rent-a-charter'' is not a
legal or technical concept, OCC staff took the concept to refer to
situations in which a nonbank paid a fee to a bank for the sole purpose
of evading legal requirements, without the bank actually being involved
in loan underwriting, risk management, or legal compliance. In short,
the OCC took ``rent-a-charter'' to mean an arrangement in which the
nonbank was seeking to ensure that no one was actually responsible for
consumer protection or other compliance obligations.
That is precisely why the OCC, in issuing the True Lender Rule,
expressly stated that it would ``hold[ . . . ] banks accountable for
all loans they make, including those made in the context of marketplace
lending partnerships or other loan sale arrangements.'' \17\
Specifically, the OCC emphasized its ``expectation that all banks
[will] establish and maintain prudent credit underwriting practices and
comply with applicable law, even when they partner with third
parties.'' \18\ If not, ``the OCC will not hesitate to use its
enforcement authority consistent with its longstanding policy and
practice.'' \19\ This is in contrast with historical practice in which
banks sought to minimize their role in loan origination at the same
time their marketing partners sought to disclaim responsibility as the
true lender. Under the True Lender Rule, the days of each party
pointing the finger at the other are over; borrowers and regulators now
know who is responsible if the bank either is named on the note or
funds the loan on the date of origination. This clarity thus is
positive not only for secondary market functioning, but for consumer
protection accountability.
---------------------------------------------------------------------------
\17\ https://www.federalregister.gov/documents/2020/10/30/2020-
24134/national-banks-and-federal-savings-associations-as-lenders
\18\ Id.
\19\ Id.
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The OCC has a long history of holding banks accountable for failing
to manage the consumer protection obligations and compliance risks of
third-party service providers, including those partners involved in
making loans to consumers. In the early 2000s, the OCC took several
groundbreaking actions that are precedents for preventing abuses in
certain relationships. \20\ Those actions continue to provide an
important playbook for consumer protection today and demonstrate the
value of strong Federal supervision.
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\20\ See, e.g., OCC NR 2002-85 (https://www.occ.gov/news-
issuances/news-releases/2002-nr-occ-2002-85.html); NR 2003-6 (https://
www.occ.gov/news-issuances/news-releases/2003/nr-occ-2003-6.html); NR
2003-3 (https://www.occ.gov/news-issuances/news-releases/2003/nr-occ-
2003-3.html).
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True Lender and the Role of States: The Dual Banking System, Parity,
and Usury
Some critics of interest rate exportation claim that it undermines
State authority over their own credit markets. That has not been the
view of leaders of either party historically. As noted above, the
Marquette decision holding that national banks may export their home
States' interest rate to borrowers in other States was argued by Robert
Bork and decided by Justice William Brennan writing for a unanimous
Supreme Court; the Depository Institutions Deregulation and Monetary
Control Act, which extended interest rate exportation powers to State
banks, was approved by overwhelming majorities of both parties in
Congress and signed into law by President Jimmy Carter; and President
Obama's Solicitor General took the position that Madden, the most
prominent case to criticize interest rate exportation in the context of
secondary market loan sales, was wrongly decided. Nonetheless, the
argument persists that States should be able to establish the rules for
their own credit markets, and that interest rate exportation somehow
interferes with that principle.
The most straightforward answer to this concern is that Congress
viewed the correct balance of State and Federal power through the lens
of the dual banking system. In Congress' view, the most important
concern was not preserving State usury laws but ensuring that State
banks operate on a level playing field as national banks. Thus, as
noted, Congress gave State banks the same authority to export their
home States' interest rates that national banks enjoyed under
Marquette.
Second, nothing about the True Lender Rule (as distinct from the
``valid when made'' rule, which is not under Congressional Review Act
challenge) affects State authority to set rules regarding when a State-
chartered bank (as opposed to a marketplace lender) is the true
originator of a given loan. This is why the OCC and FDIC both adopted
versions of the ``valid when made'' rule, but only the OCC adopted the
True Lender Rule. The OCC, as the chartering agency for national banks,
has the statutory authority to interpret national bank powers. The
FDIC, which is not a chartering agency, lacks that authority with
respect to State banks. Thus States remain free to set their own true-
lender rules for their own chartered banks if they wish to do so.
Third, nothing about the True Lender Rule alters State authority to
license, supervise, and enforce laws applicable to nonbank lenders. In
fact, nonbank consumer lenders, including virtually all payday lenders
today, operate as State-licensed companies and are subject to State
supervision. The OCC supports strong State supervision of the nonbank
lenders and encourages States to use the full extent of their authority
to protect consumer from abuses that occur among these service
providers. The point of the companion ``valid when made'' and True
Lender Rules, however, is that it is not an ``abuse'' for a bank to
exercise its statutory authority to export its lawful interest rate to
borrowers in other States and to sell loans including such rates in the
secondary market.
Finally, it bears emphasis that it was Congress' decision--not the
OCC's--to allow both State and national banks to export interest rates.
That long-settled decision was not a departure from Alexander
Hamilton's view of State-Federal relations in our system of federalism.
In the same way that the first Bank of the United States was deemed
immune from State taxation because the ``power to tax involves the
power to destroy'' an instrumentality of national economic policy, \21\
a State power to constrain interest rates agreed in loans originated by
federally chartered banks would impede the functioning of the national
banking system--itself one of the most important aspects of national
economic policy. But States can set their own ``true lender'' rules for
their banks in the same way that they can charter their own banks, and
the existence of the national banking system is not a threat to State
sovereignty in either situation.
---------------------------------------------------------------------------
\21\ McCulloch v. Maryland, 17 U.S. 316 (1819).
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Thank you for the opportunity to testify today and I look forward
to answering the Committee Members' questions.
______
PREPARED STATEMENT OF CHARLES W. CALOMIRIS
Henry Kaufman Professor of Financial Institutions, Columbia Business
School
April 28, 2021
Chairman Brown, Ranking Member Toomey, Members of the Senate
Banking Committee, it is a pleasure to be with you today to discuss the
economic benefits that arise from allowing financial institutions of
various kinds to partner with each other in providing lending services
to their customers. This partnering is especially advantageous when it
occurs in the context of an integrated national market for loans, which
has produced enormous improvements in market efficiency and financial
inclusion.
I emphasize that the gains from flexible partnerships among
financial intermediaries in providing various aspects of banking
services not only result in improvements in aggregate efficiency and
better loan pricing for consumers on average; the gains also include
greater financial inclusion for our unbanked or underbanked citizens,
and that is particularly apparent in the new partnerships that are
developing between traditional enterprises and new fintech firms. At
the end of my statement I provide an appendix, which I will not present
orally, but which I ask you to admit as part of my written statement,
which summarizes in detail how fintech firms, in particular, are
contributing so much to improvements in financial inclusion.
The understanding that it is advantageous to encourage an
integrated national market that permits diverse businesses with
different comparative advantages to work together is not new. In the
Supreme Court's unanimous Marquette decision in 1978, empirical
evidence of these economic advantages informed the Justices' opinions,
and since then, over the past four decades, a massive amount of
evidence in support of this proposition has been published in top
economics journals.
Recently, a nonpartisan group of 47 leading scholars of banking
working at America's greatest universities summarized this literature
in an amicus brief, which was filed in support of the Office of the
Comptroller of the Currency's (OCC's) defense of its ``true-lender''
rule. \1\ My testimony here today will summarize for you that
consensus, which is remarkably clear and unequivocal. While economic
analysis often provides a mixed and inconclusive picture, in this case,
the conclusions about the advantages of an integrated national system
are unambiguous and the magnitude of the effects described are large,
which explains why a very prominent group of nonpartisan bank scholars
found it so easy to reach rapid agreement on their strong conclusions.
---------------------------------------------------------------------------
\1\ These scholars are faculty at the following institutions:
Babson College, Boston College, Columbia University, Cornell
University, Dartmouth College, Fordham University, Harvard University,
Indiana University, London Business School, Louisiana State, New York
University, Northwestern University, Ohio State University, Stanford
University, University of Akron, University of California-Berkeley,
University of California-Irvine, University of Chicago, University of
Florida, University of Kansas, University of Maryland, University of
North Carolina, University of Pennsylvania, University of Texas,
University of Virginia, University of Washington, Utah State,
Vanderbilt, Washington University in St. Louis.
---------------------------------------------------------------------------
Economic Advantages of Banks' Partnering With Others To Provide Loan-
Related Services
As background, the OCC's ``true lender'' rule clarified that a bank
that originates a loan retains the consumer protection obligations
related to making that loan whether or not it sells the loan to another
party. This rule guards against fears of shady origination practices,
``rent-a-charter'' schemes, or predatory lending for consumer loans
that are originated within the Federal banking system and sold to
others. The rule adheres to longstanding legal precedents by making it
clear that the origination of the loan is the act of lending. The sale
of the loan, like the sale of any asset, does not change that fact.
Some State authorities have sought to impose new limits on
interstate banking by claiming that the act of selling a loan somehow
changes who the original lender was and potentially invalidates the
terms of the loan, which were valid when made. A key goal of this legal
theory appears to be preserving the ability of the State to enforce
usury laws that limit interest rates on loans to its residents. For
example, a national or State bank in South Dakota can originate a loan
with a borrower in California at a rate above the California usury
ceiling, and then sell it to another lender.
Ever since the unanimous Supreme Court Marquette decision in 1978
it has been clear that a federally chartered bank headquartered in one
State may originate loans in other States, and when doing so the bank
is not bound by the usury laws of the States other than the one in
which it is headquartered. The new challenge to interstate banking
invents a new theory that somehow the terms of a loan at origination,
such as its interest rate, are rendered impermissible as the result of
the sale of the loan.
Obviously, if this new theory were upheld in the courts, it would
wreak havoc on the national market for loan sales. But why should
anyone care? Why does the ability to sell a loan matter to individual
consumers?
As I alluded to before, 47 prominent academic economists
specializing in banking and bank regulation have just provided the
answers to those questions in a brief filed in support of the OCC's
position in the case in question. \2\ Their cogent analysis,
summarizing decades of academic research on the social gains that have
been reaped from the growth of the loan sales market that occurred
after the Marquette decision, deserves widespread public attention. My
summary of their argument includes many direct quotations, which are
excerpts from the brief.
---------------------------------------------------------------------------
\2\ ``Brief of Amicus Curiae in Opposition to Plaintiffs' Motion
for Summary Judgment and in Support of Defendants' Cross-Motion for
Summary Judgment'', U.S. District Court, Northern District of
California, Oakland Division, Case No. 20-cv-05200-JSW, Hon. Jeffrey S.
White, Filed January 21, 2021.
---------------------------------------------------------------------------
Their central insight is that the competitive abilities to
originate loans, to hold loans, or to perform other services related to
loan, can differ across different financial service providers. One bank
may be positioned well to originate a particular loan while a different
bank may be better positioned to hold it. The divergence of comparative
advantage in origination and holding loans reflects ``diverse
regulatory frameworks, information processing capabilities and access
to capital.''
``Therefore, a bank's pool of local loanable funds will not
necessarily always match the loan demand generated by the supply of
local investable projects. Some markets will have an oversupply of good
borrowers that cannot be funded by banks, while other markets will have
an excess of funds due to the lack of good borrowers. The ability to
transfer loans between institutions improves efficiency and production
in both types of markets, by allowing funds to flow across space. Local
institutions can exploit local information to make good origination
decisions, whereas other institutions having excess local funds are
able to hold more good loans than they would otherwise be able to make
to (their) local borrowers.''
``If . . . the usury law of the loan buyer's State applied to the
loan, the market for loan sales would be significantly disrupted: an
institution in one State could legally make the loan but institutions
in other States may not purchase it with the same pricing.
Consequently, the integrated secondary market for loan sales would be
reduced and fragmented across groups of States with similar usury laws.
Therefore, to preserve a well-functioning market for loan sales, the
OCC's Rule should be maintained.''
Why does preserving efficiency in the loan market matter?
``Economists have found that a well-functioning secondary market for
loans has three benefits and these benefits would be mitigated if loan
sales are restricted. First, loan sales expand the supply of credit by
giving originating banks the opportunity to finance loans less
expensively. The expansion of the banking system's aggregate lending
capacity and the allocation of capital to the most productive projects
regardless of location have important macroeconomic implications, such
as greater economic growth.''
``Second, loan sales reduce the risk of lending amongst banks by
allowing greater diversification of lending portfolios. By buying loans
from around the country, banks can reduce their exposure to the
geography-specific risk in their immediate area. Banking system risk
can also be reduced by sharing it with nonbank buyers of loans.''
``Third, the expansion of lending and lowering of risk made
possible by loan sales should lead to more financial inclusion and
broader access to credit. Studies have shown that loan sales reduce the
interest rates that borrowers pay on their loans and increase the
likelihood that borrowers will receive a loan. These advantages should,
in theory, be especially important for small and risky borrowers, who
are often excluded from receiving loans when credit is constrained.
Such financial inclusion has been highlighted as important for economic
growth and a more equal distribution of wealth and income. Moreover,
many innovative new (fintech) lenders rely on loan sales as a means of
leveraging their origination capabilities, which can carry particular
benefits for less wealthy or higher-risk borrowers. Encouraging loan
sales will allow innovative new lenders to originate loans on a larger
scale. Limits on the viability of the loan sales market would therefore
have adverse effects on the underserved by limiting their ability to
receive lower cost loans as well as receive funds through innovative
financial inclusion intermediaries.''
In other words, if the market for loan sales disappeared, credit
supply would be reduced, and banks would become riskier, leading banks
to charge more for all loans. Furthermore, the borrowers who would be
hardest hit by this change would be those at the lowest rungs of the
credit ladder, the ``small and risky borrowers,'' because loan sales
are playing a particularly important role in expanding financial
inclusion, particularly for new fintech lenders.
The amicus brief points out that interstate loan sales are not a
sideshow in our financial system. ``The benefits of loan sales are
clearly indicated by the fact that loan sales constitute a central
component of the banking business. And while some loan sales would
remain legal regardless of the court's ruling, the activity and depth
of the secondary loan market would be limited if the court required
that sold loans conform to the usury laws of the purchaser's State.''
So, the benefits of interstate loan sales to consumers, especially
the most vulnerable borrowers, are substantial. But shouldn't we worry
that allowing loan sales across State lines undermines the
effectiveness of usury laws? Doesn't that aspect of loan sales harm
consumers? The brief, and the research it references, shows that more
than four decades of research on this question provide a clear answer:
no.
``The academic literature on the relative benefits and costs of
maintaining usury rates provides a useful context for the decision.
Usury rates attempt to restrict any potential market power that banks
can use to disadvantage borrowers. However, usury ceilings also could
differentially curtail loans to riskier and lower-quality borrowers,
thus pushing them towards less-regulated types of borrowing. Empirical
research quite broadly supports the notion that the latter effect
dominates: that riskier-looking borrowers (who are often minorities or
others with limited financial access) are hurt when usury ceilings are
binding and benefited when they are loosened or eliminated.
Interpreting the National Bank Act in a way that, contrary to the
statutory scheme and the OCC's interpretation, allows usury laws from
States not connected to the original loan transaction to frustrate loan
sales, therefore, is likely to reduce the economic advantages of the
secondary loan market in ways that adversely affect income and wealth
distribution within the economy.''
As I noted at the outset, rarely does economic analysis provide
such clear, unambiguous conclusions. But in this case, scores of
academic studies over many years repeatedly have reached the same
conclusions. Well-intentioned advocates of limiting the interstate loan
sales market in the interest of helping the poor need to read this
amicus brief and the studies it cites.
To the many insightful points made in the amicus brief I want to
close with two of my own observations. First, advocates of usury laws
sometimes point to borrowers' lack of information as a rationale for
usury laws. For example, a borrower that would qualify for a loan at 8
percent may not be aware that he or she would qualify for that loan,
and a lender might trick him or her into agreeing to a loan with a much
higher interest rate. This sort of trickery is possible when loan
markets lack competition, and when borrowers lack information about
their own credit risk. As the appendix to my testimony shows, the role
of new fintech entrants in strengthening competition and empowering
borrowers with new sources of information are precisely the reasons
that fintech firms are making important contributions to financial
inclusion. Rather than rely on usury laws and try to limit fintech-bank
partnerships and thereby reduce the supply of credit, the right
approach to dealing with potentially abusive credit practices is to
encourage new partnerships with these new borrower empowering fintech
providers.
Finally, there is a broader point that also deserves emphasizing,
which the authors of the brief did not make. The Federal banking system
was created in part to guarantee that Americans can participate in a
national credit market by virtue of their status as American citizens.
By maintaining a Federal banking system, we ensure that citizens have
the economic freedom to enter into contracts with federally chartered
banks if they wish to do so. When they do so, they are aware that
Federal bank regulators, such as the OCC, maintain a strong and
credible commitment to monitor those banks to ensure that credit and
other banking services are provided in a manner consistent with safe
and sound banking, as well as ethical treatment of consumers. In my
experience as a public servant, and in my research as a historian of
the OCC, I can affirm that this commitment is real, and that it should
be a great source of pride to our country. It makes the economic
freedom to engage in a Federal banking system especially meaningful and
beneficial for consumers. The Federal banking system is not just a
collection of banks, it is and always has been a source of economic
freedom that empowers individuals and in doing so keeps our financial
system, economy, and Nation strong.
Appendix: Fintechs as Levers for Financial Inclusion
Not only are new unbundled fintech providers more profitable and
efficient than traditional banks, their technologies are proving to be
very promising for improving access to financial services for many
people who have not been served well by traditional banks, especially
lower-income people. They can do so either as stand-alone service
providers or acting in partnerships with other banks.
The U.S. banking system serves about 80 percent of American
families' needs to make payments, save, and borrow. But what about the
other 20 percent, the so-called unbanked and underbanked? What barriers
explain why the normally reliable pressure of market competition has
not led banks to compete for the business of such a large fraction of
the population? How are fintech banks (a term I will use to refer both
to chartered and nonchartered, ``shadow'' fintech banks) breaking down
some of those barriers?
Historically, the barriers that have kept the unbanked or
underbanked from becoming fully integrated into the formal financial
sector consist of several supply-side and demand-side factors. On the
supply side, these include challenges lenders face in differentiating
borrowers' risks, the high transaction costs of serving small-dollar
customers, and the costs of regulatory uncertainty (which are often
defined on a per-customer basis, and therefore, disproportionately
disadvantage small dollar customers). On the demand-side, factors such
as the limited financial resources of low-income customers, their
limited experience with financial service providers, and their
preferences for particular kinds of products can limit access.
With respect to demand-side factors, how have fintech banks
improved financial access for the unbanked or underbanked? According to
an FDIC survey, 13 percent of unbanked households state that banks do
not offer products or services that they need. For example, a majority
of unbanked or underbanked households live paycheck to paycheck, cannot
afford the high standard minimum balances or account fees banks
require, and do not live near branches. \3\ To meet some of these
demands, fintech banks have developed different products that may be
particularly attractive to unbanked or underbanked households. In
particular, fintech banks provide novel products with low-cost fees or
and smaller minimum small dollar amount loans. For example, some offer
free overdraft protection (typically limited to up to $100) \4\ or 0
percent APR cash advance that requires no credit check and no monthly
fee (limited to $250). \5\ Many now offer bank accounts with no monthly
fees, no overdraft fees for limited overdraft protection, and no
minimum balance fees, as well as no ATM fee access for in-network ATMs.
\6\ The common denominator of these products is that physical cost
savings from operating as a fintech provider make it more economical to
serve small-dollar amount customers, which is particularly advantageous
to low-income customers.
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\3\ Indeed, about 9 percent of unbanked household cite
inconvenient location or inconvenient hours as the reason for not
having a bank account.
\4\ Chime.com; Varomoney.com; Dave.com.
\5\ Moneylion.com.
\6\ Chime.com; Varomoney.com; Dave.com; Moneylion.com.
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Other fintech banks have designed products to smooth spending in
the face of high frequency fluctuations in customers' incomes. Because
there is a lag between the days wages are earned and the day that
employees are paid, some fintech banks have attracted unbanked and
underbanked customers by offering ``paycheck deposits.'' \7\ Instead of
depositing paycheck funds into a customer's account with the
traditional delay (waiting for the funds to clear from the employer's
bank), these fintech banks deposit the funds as soon as the transfer
instructions are received, taking on the minimal risk that the
employer's bank is unable to fund the transaction. This decreases the
customer's waiting time by 2 days. Other fintech banks offer customers
access to their wages in advance of the pay day on terms that are
generally far superior to payday lenders or to the costs of paying
traditional bank overdraft fees. \8\
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\7\ Chime.com; Varomoney.com; Dave.com; Moneylion.com.
\8\ Even.com and Payactiv.com.
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Fintech banks also cater to unbanked and underbanked customers'
demands by designing innovative and convenient means for customers to
access services through mobile phones, therefore obviating the need to
be near a branch. Because the majority of unbanked and underbanked
households have mobile phones, fintech banks have been able to attract
many low-income customers by offering mobile phone access.
Consumers with limited financial experience sometimes make
financial decisions that damage their credit record and leave high-cost
lenders as their only option. Financial education and counseling
services can reduce these costly mistakes. While academic evidence
regarding the impact of financial education and counseling has been
mixed, there is evidence that certain approaches provide benefits. In
particular, education appears to be most effective when it is targeted
to a particular borrower's needs and is delivered at the time the
knowledge can be used. \9\ For example, research has shown that
mortgage counseling conducted at the time a mortgage is originated can
reduce default rates. \10\
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\9\ Fernandes, D., Lynch, J.G., Jr., and Netemeyer, R.G. (2014)
``Financial Literacy, Financial Education and Downstream Financial
Behaviors''. Management Science 60: 1861-83.
\10\ Agarwal, S., Amromin, G., Ben-David, I., Chomsisengphet, S.,
and Evanoff, D. (2020) ``Financial Education Versus Costly Counseling:
How To Dissuade Borrowers From Choosing Risky Mortgages?'' American
Economic Journal: Economic Policy 12: 1-32.
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Many fintech banks provide precisely this form of financial
counseling as part of the loan products they offer. They use a wide
range of educational services to build relationships with customers
that have limited experience with financial transactions. One online
lender offers lower rates for completing their online courses on
managing debt, \11\ while another online lender prominently advertises
``community support'' whereby borrowers are connected with free and
trusted financial counselors. \12\ Other fintech banks produce free
content for customers or potential customers to help explain when and
how their products fit into a well-managed financial plan or to
instruct customers on managing finances and debt more generally. \13\
Finally, many comparison shopping fintech banks provide free tools for
consumers to evaluate alternative debt scenarios, such as debt
consolidation, or to create a plan to reach a savings goal. \14\ To
reduce confusion or misunderstandings that can undermine trust, some
fintech providers have developed products that alert customers when
they are at risk of being charged a fee, thus helping to reduce fees
and improve their decision making. \15\
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\11\ Lendup.com.
\12\ Oportun.com.
\13\ Personifyfinancial.com; Saverlife.org.
\14\ Nerdwallet.com; Lendingtree.com.
\15\ Opportunities for mobile financial services to engage
underserved consumers (FDIC 2016).
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With respect to supply-side factors, many innovative fintech
business models are reducing the costs of serving customers. These
costs consist of physical costs and information costs. Physical costs
are lower for fintechs because they avoid the high overhead costs of
traditional banks, which is especially beneficial to small-dollar
account customers.
With respect to information costs, many unbanked and underbanked
customers are ``credit invisibles''--people without formal credit
scores. That lack of information makes it challenging to lend to them.
For an estimated 26 million Americans, traditional credit products
remain out of reach because they lack a credit score. \16\ These
``credit invisibles'' often turn to payday lenders, pawn shops, or
auto-title lenders, or end up paying high overdraft fees at traditional
banks. Such borrowing is expensive, with APRs as high as 300 percent.
\17\ What's more, repayment of these loans often doesn't establish a
credit score so experience in these markets brings borrowers no closer
to cheaper credit. Instead, they end up in cycles of accumulating debt.
Such borrowing amounts to over 280 million transactions per year and
roughly $78 billion in revenue. \18\
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\16\ https://files.consumerfinance.gov/f/201505--cfpb--data-point-
credit-invisibles.pdf
\17\ https://www.urban.org/sites/default/files/publication/57871/
410935-analysis-of-alternative-financial-serviceproviders.pdf
\18\ https://www.urban.org/sites/default/files/publication/57871/
410935-analysis-of-alternative-financial-serviceproviders.pdf
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An important aspect of fintech banks' ability to provide improved
access to credit for consumers comes from their use of new sources of
information. \19\ By using information not traditionally found in a
credit report, lenders are able to safely and affordably lend to
customers with little or no credit history. Fintech banks such as
Oportun and Upstart have advertised that using alternative data has
allowed them to successfully provide credit to households who lack the
formal credit scores required by most financial institutions. Some
fintech lenders have started to use consumers' cash flow history--how
much income flows into the person's bank accounts and how much spending
draws out of them--to underwrite credit, while other fintech lenders
use utility and telecom payment data to inform their risk-scoring. One
study finds that roughly half of credit invisibles interested in
obtaining credit have stayed current on all of their bills in the past
12 months. \20\ By using such alternative credit data to approve loans,
fintech lenders can offer lower prices than their traditional
counterparts. A LexisNexus study finds that of the 24 percent of
consumers in their sample without a credit bureau score, \21\ 86
percent became scorable using RiskView, a credit score that uses
alternative data. However, the proportion of unbanked and underbanked
consumers who would benefit from such a score or other applications of
alternative data is hard to estimate precisely.
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\19\ See Jagtiani, J., and John, K. (2018) ``Fintech: The Impact
on Consumers and Regulatory Responses''. Journal of Economics and
Business 100: 1-6.
\20\ https://www.fdic.gov/householdsurvey/2017/2017report.pdf
\21\ Consumers who did not have enough credit history to be
scorable because it either did not have recent activity on their
credit, only nontradeline data, or no credit obligations open for a
long enough duration.
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We are seeing only the beginning of what fintech banks can do to
improve the efficiency of the financial system and promote financial
inclusion. The industry continues to evolve as new and better
approaches enter the market. As with traditional lending, fintech
lending entails safety, soundness, and fairness risks. But the
financial services industry and its regulators are well equipped to
handle these risks.
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM JOSH STEIN
Q.1. A 2018 audit \1\ by Nevada's Division of Financial
Institutions found that nearly one-third of payday lenders in
Nevada had failed to abide by State laws and regulations each
year. Does the OCC's Rule allow payday lenders to evade State
laws outside of interest rate caps?
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\1\ https://www.leg.state.nv.us/Division/Audit/Full/BE2018/
LA%2018-18%20Division%20of%20Financial%20Institutions%20Report.pdf
A.1. The OCC Rule will predictably spur the proliferation of
rent-a-bank schemes by nonbank lenders in order to evade both
State interest rate caps and other State consumer protection
laws. When nonbank lenders hide behind rent-a-bank subterfuges,
the nonbank lenders typically claim they are exempt from
licensing by and examination from State banking regulators.
This refusal by lenders using rent-a-bank schemes to comply
with State licensing laws profoundly undercuts the ability of
States to regulate these lenders' activities, including
ensuring that the lenders comply with State laws outside of
interest rate caps.
In North Carolina's experience in the early 2000s, multiple
nonbank payday lenders turned to rent-a-bank subterfuges after
North Carolina's law authorizing payday lending for an
experimental period sunset in 2001. The nonbank payday lenders
largely continued their payday lending business as they had
before the sunset, but the banks' names were instead placed on
the loan documents in order to evade North Carolina's interest
rate caps. These nonbank payday lenders contended that they
were merely the ``marketing, processing and servicing agents''
of the banks and that they were exempt from regulation by
financial regulators in our State. The North Carolina
Commissioner of Banks and then-Attorney General Roy Cooper
rejected that argument as contrary to the true lender doctrine
recognized by North Carolina law. The OCC's Rule undercuts my
ability to defend against such arguments in the future.
Q.2. If the OCC's Rule remains in place, what impact can we
expect on communities of color who are disproportionately
impacted by the pandemic?
A.2. The OCC's Rule will promote predatory lending in the
substantial number of States that have enacted State interest
rate caps. Studies have shown that such high-cost lending
disproportionally affects communities of color. For example,
FDIC surveys have reported that in 2013-2017, 12-14 percent of
African-Americans and 8-10 percent of Latinos used a form of
high-cost credit (payday loans, refund anticipation loans,
rent-to-own services, pawn shop loans, and auto title loans),
compared with only 6 percent of Whites. \2\ Therefore, I expect
the OCC's Rule would have a disproportionate impact on
communities of color and other populations whose financial
vulnerability increased because of the pandemic.
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\2\ FDIC National Survey of Unbanked and Underbanked Households:
2017, appendix table D.3, https://www.fdic.gov/analysis/household-
survey/2017/2017appendix.pdf.
Q.3. Does the OCC's Rule limit the ability of State bank
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regulators to identify and prosecute fair lending violations?
A.3. The OCC's Rule will predictably limit the ability of State
bank regulators and other State enforcement agencies to
identify and prosecute fair lending violations. For the reasons
explained in response to your first question, the OCC's Rule
will embolden nonbank lenders that would otherwise be subject
to licensing and examination by State financial regulators to
claim an exemption from such State requirements. It is
significantly more difficult for State financial regulators to
identify and prosecute violations of fair lending against
entities that they do not license and examine.
Q.4. Under its current authorities, is the OCC capable of
appropriately supervising rent-a-bank arrangements?
A.4. Under long-standing statutory and case law, nonbank
lenders, including payday lenders, are subject to State law and
historically have been regulated at the State level. Rent-a-
bank arrangements are initiated by nonbank lenders to evade
State interest rate laws in States with strong interest rate
caps. These schemes are typically not used by nonbank lenders
in States that authorize payday lending. The OCC, as a Federal
banking regulator, does not supervise or regulate nonbanks.
Therefore, where nonbank lenders use rent-a-bank arrangements
as a shield, there exists a regulatory vacuum, as these nonbank
lenders contend they are not subject to State regulation, at
the same time that the OCC does not examine or regulate them.
Currently, there are several OCC-supervised banks that have
entered into arrangements with nonbank lenders that are making
predatory triple-digit interest rate loans to consumers and
businesses that are illegal under many States' lending laws.
However, the OCC has not only failed to take any recent
enforcement actions against the nonbank lenders, but it has
also ignored the banks it supervises, refusing to stop these
rent-a-bank arrangements and these lending activities. Under
this so-called ``True Lender'' Rule, these rent-a-bank
arrangements are tacitly, if not explicitly, approved, so the
OCC will have no incentive to take action against these
arrangements; and State Attorneys General and State banking
regulators will have substantially less authority to do so--
leaving these sham arrangements to flourish and their predatory
loans to harm our consumers in violation of States' laws.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM LISA F. STIFLER
Q.1. If the OCC's Rule remains in place, how would it affect
the use of payday lending in Nevada, which has no State
interest rate cap on payday loans?
A.1. If the OCC's ``fake lender'' rule remains in place,
States, like Nevada, that currently allow payday lending or
other high-cost lending will see more predatory lending come to
the State, and future efforts to address predatory lending will
be incredibly difficult. Additionally, beyond payday lending,
Nevada will see high-cost installment loans that are currently
illegal under State law expand via rent-a-bank schemes.
Although Nevada allows payday loans, the State caps the
interest rate on a $2,000, 2-year loan at about 40 percent. The
OCC's rule will allow nonbank lenders to partner with banks to
make similar sized loans at rates over 200 percent APR.
Q.2. A 2018 audit \1\ by Nevada's Division of Financial
Institutions found that nearly one-third of payday lenders in
Nevada had failed to abide by State laws and regulations each
year. Does the OCC's Rule allow payday lenders to evade State
laws outside of interest rate caps?
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\1\ https://www.leg.state.nv.us/Division/Audit/Full/BE2018/
LA%2018-18%20Division%20of%20Financial%20Institutions%20Report.pdf
A.2. Yes, the OCC's rule will not only allow nonbank lenders,
like payday and other high-cost lenders, to evade the interest
rate caps. They will also be able, in many States, to evade
licensing and oversight laws and related regulations, as well
as other consumer protections in State law, including fair
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lending laws.
Q.3. During the COVID-19 pandemic, have you seen an increase in
the number of payday loans made to borrowers?
A.3. According to a Veritec report \2\ of 7 States, there was a
decrease in payday lending during COVID-19. Overall, payday
lending transaction volumes have trended downward. During the
pandemic, the report showed ``a decline of roughly 20 percent
for the week ending March 21. Transaction activity
progressively trended downward between the week ending March 14
and early May 2020 when compared to the same periods in 2019.''
We also have seen in SEC filings from large high-cost lenders
that they have decreased originations during the pandemic.
Volumes have also decreased due in part to moratoriums and
stimulus relief; however, as the country reopens, we anticipate
seeing originations increase.
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\2\ https://www.veritecs.com/wp-content/uploads/2020/07/Veritec-
COVID-study-rev.pdf
Q.4. If the OCC's Rule remains in place, what impact can we
expect on communities of color who are disproportionately
---------------------------------------------------------------------------
impacted by the pandemic?
A.4. Communities of color have been disproportionately impacted
by the pandemic. They are also disproportionately targeted by
high-cost lenders. Rather than help communities of color, high-
cost lending disproportionately harms communities of color,
exploiting and fueling the racial wealth gap. We can expect
more of the same if this rule remains in effect.
Online lenders often promote their models as expanding
economic inclusion, which will often put borrowers of color
among their target borrowers. Communities of color have
historically been disproportionately left out of the
traditional banking system, a disparity that persists today.
Some defend the high-cost ``fintech'' loans as bringing
communities of color into the economic mainstream. But high-
cost loans, particularly with their high association with lost
bank accounts, drive borrowers out of the banking system and
exacerbate this disparity. By sustaining and exacerbating an
existing precarious financial situation, high-cost lending
reinforces and magnifies existing income and wealth gaps--
legacies of continuing discrimination--and perpetuates
discrimination today.
Q.5. Does the OCC's Rule limit the ability to identify and
prosecute fair lending violations?
A.5. The OCC's Rule will impede the ability of States to
identify and especially prosecute fair lending violations.
Because the Rule will give nonbank lenders the ability to hide
behind a national bank charter so long as that bank's name is
on the paperwork, attempts by States to enforce their laws
against the nonbank lenders will be challenged as being
preempted by Federal law. And yet, the OCC will not oversee or
examine the nonbank lenders for fair lending or other
violations because the OCC only oversees national banks. As a
result, a potentially large group of high-cost lenders will be
able to evade oversight by both State and Federal financial
regulators, making enforcement of State, and potentially even
Federal, fair lending laws quite challenging.
Q.6. Under its current authorities, is the OCC capable of
appropriately supervising rent-a-bank arrangements?
A.6. The OCC does not need the Rule to appropriately supervise
and take action against banks that engage in predatory rent-a-
bank schemes. The agency already has that authority. It took
action in the early 2000s to crack down on illegal schemes that
were intended to evade State interest rate laws, and it can do
so now. However, the agency has chosen not to act, despite
being fully aware of predatory small business loans being made
at rates as high as 268 percent by World Business Lenders
(WBL), assisted by OCC-supervised Axos Bank. Additionally, the
OCC defended WBL in court. \3\
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\3\ https://morningconsult.com/opinions/new-fdic-occ-proposal-
puts-small-businesses-in-the-path-of-loan-sharks/
Additional Material Supplied for the Record
LETTER IN SUPPORT OF S.J. RES. 15 AND H.J. RES. 35
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]